UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 3 to Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year ended June 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) of the
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the transition period from to
Commission File Number 0-4281
ALLIANCE GAMING CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 88-0104066
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
4380 Boulder Highway
Las Vegas, Nevada 89121
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (702) 435-4200
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.10 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
The aggregate market value of the voting stock held by non-
affiliates of the registrant was approximately $32,641,000 as of
March 4, 1996.
The number of shares of Common Stock, $0.10 par value,
outstanding as of March 4, 1996 according to the records of
registrant's registrar and transfer agent, was 11,654,150.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its
Annual Meeting of Stockholders to be held on or about April 1,
1996 (to be filed) are incorporated by reference into Part III of
this Form 10-K.
PART I
ITEM 1. BUSINESS
Introduction
Alliance Gaming Corporation (the "Company") is a diversified
gaming company which (at June 30, 1995) operates approximately
7,184 gaming devices (primarily video poker devices and slot
machines). The Company is the largest private gaming device
route operator in Nevada and one of the largest in the United
States. In its Nevada gaming device route operations, the
Company selects, owns, installs, manages and services gaming
devices (approximately 5,208 as of June 30, 1995) in third-party
owned local establishments such as taverns, restaurants,
supermarkets, drug stores and convenience stores (approximately
516 locations as of June 30, 1995). Also in Nevada, the Company
owns and operates one full service small casino and leases and
operates a small casino, one small casino-hotel and three taverns
which collectively have approximately 703 gaming devices and 9
table games. In the fiscal year ended June 30, 1992, the Company
expanded its gaming device route operations to Louisiana, where
it is the operator of approximately 694 video poker devices at
the only racetrack and associated off-track betting parlors
("OTBs") in the greater New Orleans area. In March 1995, the
Company completed its acquisition of the general partnership
interest in the Rainbow Casino Vicksburg Partnership, L.P.
("RCVP"). RCVP owns a dockside casino in Vicksburg, Mississippi
which contains approximately 579 gaming devices and 28 table
games. Additionally, the Company manages the casino pursuant to a
long term management contract. The Company had previously
acquired 45% of RCVP through a limited partnership interest
acquired in July 1994. The Company also designs and manufactures
gaming devices which are exclusively used in its Nevada
operations.
The Company's gaming strategy is to aggressively build its gaming
business in both existing markets, such as Nevada, as well as in
emerging gaming markets nationally. The Company will use its
diversified gaming expertise, strengthened executive management,
business partners and investment community relationships to
pursue new casino operations as well as dockside, riverboat and
Native American operations in addition to expanding the existing
route business as well as the supply and management of gaming
devices.
The Company was incorporated in Nevada on September 30, 1968
under the name Advanced Patent Technology. The Company changed
its name to Gaming and Technology, Inc. in 1983, to United
Gaming, Inc. in 1988 and to Alliance Gaming Corporation on
December 19, 1994. The Company conducts its gaming operations
through directly and indirectly owned subsidiaries. The term
"Company" as used herein refers to Alliance Gaming Corporation
and such subsidiaries unless the context otherwise requires. The
Company's principal executive offices are located at 4380 Boulder
Highway, Las Vegas, Nevada 89121; telephone (702)435-4200.
Gaming Device Route Operations
Nevada
Operations. The Company's Nevada gaming route operations involve
the selection, ownership, installation, operation and maintenance
of video poker devices, reel-type slot machines and other gaming
devices in local establishments such as taverns, restaurants,
supermarkets, drug stores and convenience stores operated by
third parties ("local establishments"). The Company's gaming
device route operations target local residents who generally
frequent local establishments close to their homes.
The following table sets forth certain historical data concerning
the Company's Nevada gaming device route operations:
As of June 30
1991 1992 1993 1994 1995
Number of gaming devices owned 5,240 5,505 5,121 5,148 5,208
Number of locations 527 552 508 496 516
The Company enters into gaming device route agreements with local
establishments through either space leases or revenue-sharing
agreements. In revenue sharing arrangements, most common with
taverns, restaurants and convenience stores, the Company does not
pay rent, but rather receives a percentage of the revenues from
the gaming devices. In revenue sharing arrangements, both the
owner of the local establishment and the Company must have a
gaming license. In space lease arrangements, most common with
supermarkets and drug stores, the Company pays a fixed rental to
the owner of the local establishment and the Company receives all
of the revenues derived from the gaming devices. In such
arrangements, only the Company (and not the establishment owner)
is required to hold a gaming license. Most of the local
establishments serviced by the Company are restricted by law to
operating no more than 15 gaming devices.
Revenue-sharing arrangements accounted for approximately 80%,
86%, and 86% of the Nevada gaming device route revenues and 77%,
80%, and 78% of its operating Nevada route gaming devices in
fiscal 1993, 1994, and 1995. At June 30, 1995, the weighted
average remaining term of the Company's revenue sharing
arrangements was approximately 4.2 years. Space lease
arrangements accounted for approximately 20%, 14%, and 14% of the
Nevada gaming route revenues and 23%, 20%, and 22% of its
operating Nevada route gaming devices in fiscal 1993, 1994, and
1995. At June 30, 1995, the weighted average remaining term of
the Company's space leases was 2.7 years.
The Company has historically been able to renew or replace
revenues from expiring agreements with revenues generated by
renewal or replacement contracts. However, during the past few
years, increased competitive pressures in the gaming route
business have increased the portion of gaming route revenues
payable to the local establishment, decreasing the Company's
gross margins from these operations. As a result, the Company
has refocused its Nevada gaming device route operations to
emphasize return on investment rather than increasing market
share and has undertaken a systematic review process to adjust
its contract mix to emphasize higher margin contracts and, where
permissible, cancelling or not renewing unprofitable contracts.
Marketing. The Company believes it has a diversified customer
base with no one customer accounting for more than 10% of the
Company's revenues generated from Nevada gaming device route
operations during the fiscal year ended June 30, 1995 (although
approximately 14.1% of such revenues was generated through an
affiliated group of such customers). Such affiliated group
consists of eight partnerships each having one individual partner
who is common to all such partnerships. As the largest Nevada
gaming device route operator, the Company believes that it is
able to differentiate itself from its competitors through a full-
service operation providing its customers marketing assistance
and promotional allowances and using its advanced design
capabilities to provide gaming devices with features customized
to customers' needs, such as Gambler's Choice, a multi-game
device tailored to the local gaming market.
Strategy. The Company believes that technological enhancements
are the key to improving the appeal of its games and locations,
thereby increasing operating margins. As a result, the Company
has developed and is currently testing a new system called
"Gamblers Bonus". Gamblers Bonus is designed as a cardless slot
players' club and player tracking system which, upon approval of
by Nevada gaming authorities, will allow multiple route locations
to be linked together into a distributed gaming environment.
Through this technology, the Company will be able to provide its
players and customers with many of the same gaming choices
currently available only in a larger scale casino environment
such as multi-location progressive jackpots, bigger jackpot
payouts and traditional players' club enhancements.
Additionally, the Company will offer a series of new and unique
games available only to members of the Gamblers Bonus players'
club. The Company believes Gamblers Bonus will improve both the
revenues and operating efficiencies of its Nevada route
operations and has the potential to enhance the basic structure
of the gaming route segment of the gaming industry.
The Company is continuing its efforts to achieve cost reductions
(subsequent to cost reductions made in fiscal 1994) and adjust
its contract mix to emphasize higher margin arrangements designed
to incentivize location owners to increase gaming revenues.
Additionally, in keeping with the trends in the Nevada market,
the Company is updating its gaming device base with bill-acceptor
equipped gaming devices which are also expected to improve
revenues and operating efficiencies. The Company continues to
investigate further technological enhancements. The Company
believes that following these steps will maximize the potential
of its mature and competitive Nevada gaming route operations. In
addition, the Company intends to utilize its expertise in Nevada
gaming route operations to develop new route operation
opportunities in less mature markets.
Louisiana
Operations. In March 1992, the Company capitalized on its Nevada
gaming device route expertise to obtain a contract to operate
video poker gaming devices in the greater New Orleans, Louisiana
area through its controlled subsidiary, Video Services, Inc.
("VSI"). The Company entered into an operating agreement which
runs through May 2002 with Fair Grounds Corporation, Jefferson
Downs Corporation and Finish Line Management Corporation
(collectively, "Fair Grounds") for the Company to be the
exclusive operator of video poker devices at the only racetrack
and nine associated OTB parlors in the greater New Orleans area.
The Company selects, installs, manages and services video poker
devices for each of the 10 facilities owned by Fair Grounds for
which it receives a percentage of the revenue generated by the
devices. The Company currently has installed 694 video poker
devices in Louisiana.
Under the Louisiana gaming laws and regulations, the majority
stockholder of any entity operating video poker devices in
Louisiana must be a domiciled resident of the State of Louisiana.
As a result, the Company owns 49% of the capital stock of VSI and
three prominent members of the Louisiana business and legal
community own the remaining 51%. The Company, however, owns all
the voting stock of VSI and the majority of its officers and
directors are Company employees. The Company has a 71% interest
in dividends of VSI in the event dividends are declared. The
Company also formed two other Louisiana subsidiaries, Southern
Video Services, Inc. ("SVS") and Video Distributing Services,
Inc. ("VDSI"). Both SVS and VDSI are structured in a manner
similar to VSI except that the Company is entitled to receive 60%
of any SVS dividends. Under the terms of its contract with Fair
Grounds, the Company must conduct any additional video poker
operations in Louisiana other than gaming at racetracks or OTB
parlors through SVS. To date, SVS and VDSI have not engaged in
business in Louisiana. In addition, the Company and Fair Grounds
may have certain mutual rights of first refusal to participate in
certain Louisiana riverboat gaming opportunities of the other
party on terms and conditions to be specified.
The Company is prohibited by the Louisiana Act from engaging in
both the manufacture and operation of gaming devices in Louisiana
and, therefore, the Company does not manufacture its own gaming
devices for use in Louisiana.
On December 17, 1993, the Company incurred a fire loss at the
Fairgrounds Race Course in New Orleans where the Company operated
199 gaming devices prior to the fire, 193 of which were destroyed
in the fire. The Company was fully insured for all equipment,
leasehold improvements, other assets and business income with the
exception of immaterial deductibles. From December 17, 1993
through June 30, 1995, the Company recorded approximately
$488,000 of income from business interruption insurance proceeds.
The Company is discussing settlement of additional business
interruption claims with the insurance carrier.
Marketing. VSI has developed an extensive marketing program
under the name "The Players Room" which is designed to attract
primarily local residents to its facilities. Media placement has
focused on newspaper and radio advertising with promotions
including a player's club, direct mailings and offerings of a
wide range of prizes.
Strategy. The Company intends to selectively expand its
operations in the greater New Orleans area by increasing the
number of video poker devices in certain of its existing
locations as demand warrants, as well as investigating the
addition of new locations under its current contract with the
Fair Grounds in areas where competitive factors are favorable.
Under the Louisiana Act, racetracks and OTB parlors are permitted
to install an unlimited number of video poker devices while
truckstops and taverns may install only limited numbers of such
devices.
Casino Operations
On July 16, 1994, the Rainbow Casino located in Vicksburg,
Mississippi permanently opened for business. Through a wholly-
owned subsidiary, the Company originally purchased a 45% limited
partnership interest in RCVP, a Mississippi limited partnership
which owns the casino, all assets (including the gaming
equipment) associated with the casino and certain adjacent
parcels of land. As consideration for its 45% limited partnership
interest, the Company paid $2,000,000 in cash and issued 600,000
shares of its common stock to The Rainbow Casino Corporation
("RCC"), an unaffiliated Mississippi corporation, and its two
sole shareholders. The 55% general partnership interest in RCVP
was held by RCC. In connection with the completion of the casino,
the Company funded a $3,250,000 advance to RCC on the same terms
as RCC's financing from Hospitality Franchise Systems, Inc.
("HFS") (other than the fact that such advance is subordinate to
payments due to HFS). On March 29, 1995, the Company consummated
certain transactions whereby the Company acquired from RCC the
controlling general partnership interest in RCVP and increased
its partnership interest. In exchange for the assumption by
National Gaming Mississippi, Inc. ("NGM"), a subsidiary of
National Gaming Corporation, of approximately $1,140,000 of
liabilities (plus a financing fee payable to HFS) related to the
completion of certain incomplete elements of the project which
survived the opening of the casino (for which RCC was to have
been responsible, but failed to satisfy), a related $652,000 cash
payment by the Company to NGM and commitments by the Company and
NGM to fund additional financing required to complete the
project: (i) a subsidiary of the Company became the general
partner and RCC became the limited partner and (ii) the
respective partnership interests were adjusted. As a result of
these transactions, RCVP assumed $1,304,000 of new debt of which
50% was payable to the Company. Under the adjusted partnership
interests, RCC is entitled to receive 10% of the net available
cash flows after debt service and other items, as defined, (which
amount shall increase to 20% of cash above $35,000,000 (i.e.,
only on such incremental amount)), for a period of 15 years, such
period being subject to one year extensions for each year in
which a minimum payment of $50,000 is not made. This transaction
was accounted for as an acquisition using the purchase method.
Accordingly, the purchase price was allocated to assets acquired
based on their estimated fair values. This treatment resulted in
no cost in excess of net assets acquired (goodwill) being
recognized. The Rainbow Casino's results of operations have been
included in the consolidated results of operations since the date
of acquisition. Also, the Company's 5.2% royalty on gross
revenues was terminated on the date it became the general
partner. The entire project consists of the Rainbow Casino and
also includes an 89-room Days Inn hotel and a 10 acre indoor and
outdoor entertainment complex called Funtricity Entertainment
Park, which was developed by a subsidiary of Six Flags. Both the
hotel and entertainment park opened in late May 1995. The entire
property, known as Vicksburg Landing, is the only destination of
its kind in Mississippi containing a unique casino/family
entertainment complex.
At June 30, 1995, the Company's Nevada casino operations
consisted of owning and operating the Plantation and leasing and
operating a small casino and one small casino-hotel.
In April 1990, the Company purchased, for an aggregate purchase
price of $9,700,000, substantially all of the assets of the
Plantation Casino (the "Plantation") located near the border of
Reno and Sparks in northern Nevada. The Plantation is a 20,000
square foot casino containing 477 gaming devices, keno and 7
table games, including blackjack, craps, roulette and poker. In
addition, the Plantation offers a race and sports book which is
leased to an independent race and sports book operator. The
Plantation, which also includes an approximately 300 seat
restaurant, is convenient to both Reno and Sparks and caters to
the local market.
In July 1993, the Company began leasing and operating the casino
at the 326 room Quality Inn located approximately one mile from
the Las Vegas Strip. The casino at Quality Inn contains 156
gaming devices and 3 table games. The Company's lease to operate
this facility expired in July 1995. The Company has chosen not
to exercise its renewal rights under this lease. The Company is
currently operating under modified lease terms which expire in
December 1995.
The Company leases and operates the Mizpah Hotel and Casino
("Mizpah"), a small casino and hotel in Tonopah, Nevada. The
Mizpah has 56 rooms, two restaurants and 70 gaming devices
catering primarily to local residents and travelers between Reno
and Las Vegas. The Company's Mizpah lease has a remaining term
of approximately 7.5 years with an option on the Company's behalf
to terminate the lease arrangement at any time after December 31,
1995 with 120 days notice. The Company has notified the landlord
of the Mizpah of its intention to exercise the termination clause
of the lease and gave the requisite 120 days notice at that time.
Accordingly, the Company's lease will expire in April 1996.
Marketing. The Company's casinos target the cost conscious local
market. The Company promotes its casinos primarily by providing
quality food at reasonable prices and through special promotional
events. The Company believes its experience with operating small
casinos targeted to local markets will enable it to effectively
operate casinos in emerging gaming jurisdictions that have
similar characteristics.
Tavern Operations
The Company currently operates two taverns in the Las Vegas area.
The taverns were acquired when the owners of the locations
defaulted on their subleases with the Company. The two locations
operate a total of 80 gaming devices. In addition, each of the
locations include full-service restaurants. The Company owns
three additional such locations which defaulted on their
subleases, but which are not currently open for business or are
operated by unaffiliated third parties pending the sale of the
properties.
The remaining terms of the leases on the taverns range from
approximately 3 to 15 years with an average remaining lease term
of approximately 7 years. The lease payments range from
approximately $6,700 to $10,280 per month for locations ranging
in size from approximately 3,500 square feet to approximately
7,000 square feet. The Company's tavern operations are designed
to attract the local customer and emphasize repeat business.
Due to continuing operating losses and the incompatibility of
small independent tavern operations with the Company's overall
growth strategy, in fiscal 1994 the Company elected to dispose of
its currently operated taverns. As a result of this decision, the
Company wrote down certain assets related to the taverns to their
net realizable value and expensed the present value of future
lease payments net of assumed future sublease income. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations of Alliance- Results of Operations- Fiscal
1995 Compared with Fiscal 1994- Expenses". Subsequently, the
Company has entered into an agreement to sell all six tavern
locations to an unaffiliated third party. This agreement is
subject to, among other conditions, obtaining appropriate
approvals from Nevada gaming authorities, which approvals are
expected by the end of December 1995. No material gain or loss
will be recognized upon consummation of this sale, but the
Company expects ongoing results of operations to improve as a
result of the disposition of these unprofitable tavern locations.
In the future, although it does not intend to, the Company may
acquire other taverns due to defaults of current tenants on their
subleases or otherwise. In each such case, the Company will
evaluate the prospects and determine the best method of disposing
of such locations.
Manufacturing Operations
The Company currently manufactures and distributes gaming devices
in Nevada for use in its gaming device route operations. The
Company manufactured approximately 80% of the gaming devices
currently used in its Nevada gaming device route operations. The
manufacturing process generally involves the assembly of standard
components which are readily available from various sources. The
Company is not dependent upon any one supplier for the materials
or components used in its manufacturing operations.
The Company also participates in the development of gaming ideas,
technology and manufacturing. The Company has developed gaming
devices with bill acceptor and ticket printer features, as well
as touch screen and multi-game capabilities. The Company
anticipates utilizing these devices in many of its Nevada gaming
device route locations instead of the traditional coin operated
devices. The Company believes the adoption of the bill acceptor
and ticket printer features will increase the reliability of its
Nevada gaming devices, thereby reducing service costs. The
Company believes its development and manufacturing capabilities
are a competitive advantage.
Competition
Nevada. Gaming of all types is available throughout Nevada in
numerous locations, including many locations similar to those at
which the Company operates gaming devices. All of these other
gaming opportunities may compete directly or indirectly with the
Company. Many of the Company's competitors possess substantially
greater financial and other resources than the Company. Many of
such competitors include large casino-hotels which offer more
variety and amenities and may be perceived to have more favorable
locations than the Company.
The Company is subject to substantial direct competition for its
space lease and revenue sharing gaming device locations from
several large gaming route operators and numerous small
operators, located principally in Las Vegas, Reno and the
surrounding areas. The Company and Jackpot Enterprises are the
dominant gaming route operators in Nevada. The principal method
of competition for gaming route operators include the economic
terms of the space lease or revenue sharing arrangement, the
services provided and the reputation of the route operator. Price
competition is intense and has reduced the Company's gross margin
on such operations over the past several years as the percentage
of the gaming device revenues retained by local establishment
owners has increased. The Company expects this trend to
continue.
The operation of casinos and taverns is also a highly competitive
business. The principal competitive factors in the industry
include the quality and location of the facility, the nature and
quality of the amenities and customer services offered and the
implementation and success of marketing programs. The Company's
primary casino and tavern operations focus on the local market
rather than the tourist market. Accordingly, the Company
believes that the principal competition for the Company's
operations comes from smaller casinos and taverns. Although
large hotels and casinos also attract gaming customers from the
local market.
Louisiana. The Company is subject to extensive competition for
contracts to operate video poker devices and the Company's
racetrack and OTB parlors compete with various truck stops and
locations with liquor licenses throughout the New Orleans area.
Each truck stop is permitted to operate up to 50 video poker
devices and each tavern is permitted to operate up to 3 video
poker devices. In addition, Louisiana has authorized river boat
gaming statewide and several riverboats are operating in Orleans
Parish. Riverboats are permitted to have live table games and an
unlimited number of gaming devices, including slot machines.
Louisiana has also authorized one land based casino, permitted to
include live table games and an unlimited number of gaming
devices, which is now open and operating in temporary facilities
in New Orleans.
The adjacent state of Mississippi has legalized dockside gaming,
which attracts many local and tourist players from the New
Orleans area. The Company has one such casino located in
Vicksburg, Mississippi. Dockside gaming in Mississippi,
riverboat casinos in Louisiana and the land based casino in
Orleans Parish have a wide variety of gaming devices and table
games, while the Louisiana Act limits the Company's operations to
video poker devices only. Further, the Louisiana Act limits the
jackpot that may be paid by a video poker device to a maximum of
$1,000 per play in some cases and $500 per play in others while
other gaming activities have no such limits.
Mississippi. Dockside gaming, in the form of full-service
casinos, is legal throughout the state of Mississippi with no
limit on the number of licenses to be granted by the state gaming
authorities. As a result, the operation of casinos has become a
highly competitive business. Like Nevada, the principal
competitive factors in the industry include the quality and
location of the facility, the nature and quality of the amenities
and customer services offered and the implementation and success
of marketing programs. The Rainbow Casino appeals to both locals
and visitors to historic Vicksburg, Mississippi. Upon completion
of the three phase plan for the Rainbow Entertainment Park which
includes an 88-room Days Inn resort and a 10-acre entertainment
complex to be developed by a subsidiary of Six Flags, Rainbow
will be the only destination of its kind in Mississippi and as
such hopes to encourage a significant number of repeat visits by
both locals and tourists. The Rainbow Casino is the fourth
gaming facility to open in Vicksburg, Mississippi and, as such,
faces substantial direct competition for gaming customers in the
region.
Patents, Copyrights and Trade Secrets
The Company does not believe patent, copyright or trademark
protection to be material to its business. However, the Company
has copyrighted both the source code and the video presentation
of its games and registered many of these copyrights with the U.
S. Copyright Office under the Copyright Act of 1976. Game
version upgrades and new games are currently in the process of
United States patent and copyright registration. In addition,
some of the games have federal and/or state trademarks registered
with the U.S. Patent and Trademark office. Some of the games
(either currently used or reserved for future development) also
are covered by patents filed with the U.S. Patent and Trademark
office.
The Company has registered the trademark "CEI" and its design and
the logos of United Gaming, Inc. and United Coin Machine Co. with
the U.S. Patent and Trademark Office.
Business Development Activity
On June 19, 1995, the Company publicly proposed a negotiated
acquisition of Bally Gaming International, Inc. ("BGII") for
$12.50 per share of BGII common stock. Prior to making this
offer, the Company had acquired 500,000 shares of BGII stock on
the open market and at June 30, 1995 held 1,000,000 shares
(approximately 9.3% of BGII's total outstanding shares, based on
BGII's most recent public filings) which it acquired at an
average cost of approximately $10.41 per share. Under the
proposed terms of the offer, approximately 60% of BGII shares not
held by the Company would be acquired for cash with the remainder
exchanged for shares of the Company's common stock. The offer
was contingent upon satisfactory due diligence, regulatory and
stockholder approval and reasonable financing. At the time the
offer was made public, the Company requested expedited due
diligence, subject to a confidentiality agreement. BGII had
previously announced a planned merger with WMS Industries, Inc.
("WMS") which included an exclusive period for WMS to negotiate
the terms of that proposed merger. WMS's exclusive negotiating
period had expired several weeks before the Company's proposal
was made without announcement or action on the part of BGII or
WMS. On July 25, 1995, after being refused due diligence access
and the announcement by BGII that a definitive agreement had been
reached to merge with WMS, the Company announced its intent to
make a tender offer for BGII. The tender offer was on largely
the same terms as the originally proposed acquisition. On the
same date, the Company announced it had filed litigation in
Delaware Chancery Court requesting that the court require BGII to
grant the Company due diligence access, enjoin BGII from
proceeding with the WMS merger (including a provision therein
requiring the sale of BGII's German operations) and declare the
breakup fee provided for in the WMS merger to be invalid. The
Company indicated that it would increase the price per share of
BGII stock to $13.00 per share if the breakup fee was declared
invalid. The tender offer was conditioned upon the Company being
validly tendered a number of shares of BGII stock, which combined
with its own holdings of such stock, would give the Company a
majority of BGII's outstanding shares. The tender offer
commenced on July 28, 1995 and, as extended to date.
Subsequently, the Company announced its intention to proceed with
a consent solicitation to elect a majority of independent
directors to the BGII Board of Directors. On August 14, 1995,
the Company, BGII and WMS jointly announced an agreement whereby
the parties would hold in abeyance all activities related to
pending litigation until September 1, 1995, refrain from
commencing new litigation until that same date, BGII would
schedule its annual shareholder meeting for consideration of the
proposed WMS merger and the election of directors on October 30,
1995, and the Company would extend the expiration date of the
tender offer until September 12, 1995 and refrain from soliciting
proxies until September 1, 1995. On September 1, 1995, the
Company disclosed that it had obtained firm financing commitments
to fund the tender offer and that such commitments were not
conditioned on due diligence of BGII. Accordingly, the Company
extended the expiration date of its tender offer to September 29,
1995. BGII and WMS filed lawsuits against the Company alleging
numerous public misrepresentations had been made by the Company
with regards to the WMS-BGII agreement, the Company's tender
offer and the level of cooperation of BGII's board of directors.
Through a wholly owned subsidiary, Native American Investments,
Inc. ("NAI"), the Company has a contract to develop Class II and
III gaming opportunities with an Indian tribe in California.
Class II gaming includes bingo, pulltabs and non banking card
games that are already permitted in a state, and is subject to
the concurrent jurisdiction of the National Indian Gaming
Commission ("NIGC") and the applicable Indian tribe. Class III
gaming is a residual category composed of all forms of gaming
that are not Class I gaming (which consists of non-commercial
social games played solely for prizes of minimal value or
traditional forms of Indian gaming) or Class II gaming, including
casino style gaming. The contract is subject to negotiations
resulting in satisfactory compacts with the state and approval of
the contract by the National Indian Gaming Commission. The
Governor of California has to date refused to negotiate a compact
covering Indian gaming in California and is currently engaged in
related litigation with certain Indian tribes. In one case,
Rumsey Indian Rancheria vs. Wilson, which had been appealed to
the U.S. Ninth Circuit Court of Appeals, a three judge panel
ruled that the State of California may be obligated to negotiate
compacts with Indian tribes for Class III gaming with respect to
slot machines. However, the determination of a legal definition
for slot machines was remanded to the U.S. Federal District Court
for the Eastern District of California. In the case of Western
Telcon vs. California State Lottery, a three judge panel from the
Second Appellate District Court of Appeals ruled that the state's
lottery machines are the legal equivalent of slot machines. This
ruling was recently upheld by the full Court. The State of
California has appealed this ruling to the state Supreme Court.
There can be no assurance as to the ultimate outcome of these
litigation activities or the successful completion or operation
of any part of this project.
The Company and Casino Magic Corporation, through wholly owned
subsidiaries, are members in Kansas Gaming Partners, L.L.C.
("KGP") and Kansas Financial Partners, L.L.C. ("KFP"), both
Kansas limited liability companies. Under an option agreement
(the "Option Agreement") granted to KGP by Camptown Greyhound
Racing, Inc. ("Camptown") and The Racing Association of Kansas-
Southeast ("TRAK Southeast"), KGP has been granted the exclusive
right, which right expires on September 13, 2013, to operate
gaming devices and/or casino-type gaming at Camptown's racing
facility in Frontenac, Kansas if and when such gaming is
permitted in Kansas. In December 1994, Camptown received a
$3,205,000 loan from Boatmen's Bank which was guaranteed by KFP.
The Company and Casino Magic Corporation each invested $1,580,000
in KFP which was used to purchase a certificate of deposit to
collateralize its guaranty. Construction of Camptown's racing
facility has been completed and the facility opened for business
in May 1995. The racing facility was temporarily closed on
November 5, 1995 due to poor financial results. Camptown filed
for reorganization under Chapter 11 of the U.S. Bankruptcy Code
in January 1996 and has stated an intention to reopen for
business following bankruptcy reorganization. Boatmen's Bank
demanded payment of the Camptown loan from KFP under the terms of
the guaranty. KFP paid the loan and Boatmen's Bank returned KFP's
certificate of deposit and KFP assumed Boatmen's Bank's position
in the loan to Camptown which is secured by a second mortgage on
Camptown's greyhound racing facility in Frontenac, Kansas. TRAK
Southeast and Camptown continue to be bound by the Option
Agreement. KFP intends to vigorously pursue all of its rights and
remedies which may include, among other things, seeking authority
from the bankruptcy court to commence a foreclosure action. In
the case of a foreclosure action, KFP would be required to assume
or pay the existing first mortgage of approximately $2,000,000 if
KFP becomes the purchaser at any such sale. The Company intends
to continue to monitor its investment in KFP. The Company
believes that the Kansas legislature may consider at least two
gaming bills this session. One bill, if approved by two thirds of
both houses of the Kansas legislature, would call for a public
vote to amend the Kansas constitution to allow slot machines at
up to two gaming locations in each legislative district, with one
location being reserved for any licensed pari-mutuel location in
the district. The second bill, if passed by a majority of both
houses of the Kansas legislature, would allow, subject to local
option election of the citizens in the county, slot machines at
licensed pari-mutuel race tracks.
Growth Strategy
The Company's growth strategy is to utilize its diversified
gaming expertise, strengthened executive management, business
partners and investment community relationships to pursue a
variety of business and investment opportunities in existing
market areas such as Las Vegas and other Nevada locations, as
well as emerging gaming markets, including land based, dockside,
or riverboat (including Native American owned) casinos, the
operation of gaming device routes and the supply and management
of gaming devices.
The Company believes it is well positioned to capitalize on
investment opportunities in both existing gaming markets,
especially in Nevada, as well as emerging jurisdictions as a
result of (i) its diversified gaming expertise including gaming
device route management, casino operations and gaming device
design and manufacture, (ii) an experienced management team,
(iii) its affiliation with Kirkland-Ft. Worth Investment
Partners, L.P. ("Kirkland") and Gaming Systems Advisors, L.P.
("GSA") and (iv) its demonstrated ability to expand its gaming
operations to new jurisdictions, as evidenced by its operations
in Louisiana and Mississippi.
Employees
As of June 30, 1995, the Company employed approximately 825
persons in the State of Nevada and approximately 10 persons in
various states related to its business development activities,
VSI employed approximately 62 persons in the State of Louisiana
and RCVP employed 347 persons in the State of Mississippi. None
of such employees is covered by a collective bargaining
agreement. The Company believes its relationships with its
employees are satisfactory.
Gaming Regulations and Licensing
Nevada. The ownership and operation of casino gaming facilities
in Nevada are subject to (i) the Nevada Gaming Control Act and
the regulations promulgated thereunder (the "Nevada Act") and
(ii) various local ordinances and regulations. The Company's
gaming, manufacturing, distributing and slot route operations are
subject to the licensing and regulatory control of the Nevada
State Gaming Control Board ("Nevada Board"), the Nevada Gaming
Commission ("Nevada Commission"), the County Liquor and Gaming
Licensing Board ("Clark County Board") and various other county
and city regulatory agencies, all of which are collectively
referred to as the "Nevada Gaming Authorities".
The laws, regulations and supervisory procedures of the Nevada
Gaming Authorities are based upon declarations of public policy
which are concerned with, among other things, (i) the prevention
of unsavory or unsuitable persons from having any direct or
indirect involvement with gaming at any time in any capacity;
(ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective
control over the financial practices of licensees, including
establishment of minimum procedures for internal fiscal affairs
and the safeguarding of assets and revenues, providing reliable
record keeping and requiring the filing of periodic reports with
the Nevada Gaming Authorities; (iv) the preventing of cheating
and fraudulent practices; and (v) providing a source of state and
local revenues through taxation and licensing fees. Change in
such laws, regulations and procedures could have an adverse
effect on the Company's gaming, manufacturing, distributing and
slot route operations.
The Company is registered with the Nevada Commission as a
publicly traded corporation ("Registered Corporation"). The
Company's direct and indirect subsidiaries which conduct gaming
operations at various locations, operate a gaming device route
and manufacture and distribute gaming devices (collectively,
"Nevada Subsidiaries") are required to be licensed by the Nevada
Gaming Authorities. The licenses held by the Nevada Subsidiaries
require the periodic payments of fees, or fees and taxes, and are
not transferable. The Company has been found suitable to own the
stock of the Nevada Subsidiaries, each of which is a corporate
licensee (individually, "Corporate Licensee" and collectively,
"Corporate Licensees") under the terms of the Nevada Act. As a
Registered Corporation, the Company is required periodically to
submit detailed financial and operating reports to the Nevada
Commission and furnish any other information which the Nevada
Commission may require. No person may become a stockholder of, or
receive any percentage of the profits from the Corporate
Licensees without first obtaining licenses and approvals from the
Nevada Gaming Authorities. The Company and Corporate Licensees
have obtained from the Nevada Gaming Authorities the various
registrations, approvals, permits and licenses required in order
to engage in gaming activities, gaming device route operations,
and in the manufacture and distribution of gaming devices for use
or play in Nevada or for distribution outside of Nevada.
The Nevada Gaming Authorities may investigate any individual who
has a material relationship to, or material involvement with, the
Company or the Corporate Licensees in order to determine whether
such individual is suitable or should be licensed as a business
associate of a gaming licensee. Officers, directors and key
employees of the Company who are actively and directly involved
in the licensed activities of the Corporate Licensees may be
required to be licensed or found suitable by the Nevada Gaming
Authorities. The Nevada Gaming Authorities may deny an
application for licensing for any cause which they deem
reasonable. A finding of suitability is comparable to licensing,
and both require submission of detailed personal and financial
information followed by a thorough investigation. The applicant
for licensing or a finding of suitability must pay all the costs
of the investigation. Changes in licensed positions must be
reported to the Nevada Gaming Authorities and in addition to
their authority to deny an application for a finding of
suitability or licensure, the Nevada Gaming Authorities have
jurisdiction to disapprove a change in a corporate position.
If the Nevada Gaming Authorities were to find an officer,
director or key employee unsuitable for licensing or unsuitable
to continue having a relationship with the Company or Corporate
Licensees, the companies involved would have to sever all
relationships with such person. In addition, the Nevada
Commission may require the Company or the Corporate Licensees to
terminate the employment of any person who refuses to file
appropriate applications. Determinations of suitability or of
questions pertaining to licensing are not subject to judicial
review in Nevada.
The Company and Corporate Licensees that hold nonrestricted
licenses are required to submit detailed financial and operating
reports to the Nevada Commission. A nonrestricted license is a
license for an operation consisting of 16 or more slot machines,
or a license for any number of slot machines together with any
other game, gaming device, race book or sports pool at one
establishment. Substantially all material loans, leases, sales
of securities and similar financing transactions by the Corporate
Licensees that hold a nonrestricted license must be reported to
or approved by the Nevada Commission.
If it were determined that the Nevada Act was violated by a
Corporate Licensee, the licenses it holds could be limited,
conditioned, suspended or revoked, subject to compliance with
certain statutory and regulatory procedures. In addition, the
Company, the Corporate Licensees and the persons involved could
be subject to substantial fines for each separate violation of
the Nevada Act at the discretion of the Nevada Commission.
Further a supervisor could be appointed by the Nevada Commission
to operate any nonrestricted gaming establishment operated by a
Corporate Licensee and, under certain circumstances, earnings
generated during the supervisor's appointment (except for
reasonable rental of the casino) could be forfeited to the State
of Nevada. Limitation, conditioning or suspension of the gaming
licenses of the Corporate Licensees or the appointment of a
supervisor could (and revocation of any gaming license would)
materially adversely affect the Company's gaming operations.
Any beneficial holder of the Company's voting securities,
regardless of the number of shares owned, may be required to file
an application, be investigated, and have his suitability as a
beneficial holder of the Company's voting securities determined
if the Nevada Commission has reason to believe that such
ownership would otherwise be inconsistent with the declared
policies of the State of Nevada. The applicant must pay all
costs of investigation incurred by the Nevada Gaming Authorities
in conducting any such investigation.
The Nevada Act requires any person who acquires more than 5% of a
Registered Corporation's voting securities to report the
acquisition to the Nevada Commission. The Nevada Act requires
that beneficial owners of more than 10% of a Registered
Corporation's voting securities apply to the Nevada Commission
for a finding of suitability within 30 days after the Chairman of
the Nevada Board mails the written notice requiring such filing.
Under certain circumstances, an "institutional investor" as
defined in the Nevada Act, which acquires more than 10%, but not
more than 15%, of a Registered Corporation's voting securities
may apply to the Nevada Commission for a waiver of such finding
of suitability if such institutional investor holds the
securities for investment purposes only. An institutional
investor shall not be deemed to hold voting securities for
investment purposes unless the voting securities were acquired
and are held in the ordinary course of business as an
institutional investor and not for the purpose of causing,
directly or indirectly, the election of a majority of the members
of the board of directors of the Registered Corporation, any
change in the Registered Corporation's corporate charter, bylaws,
management, policies or operations of the Registered Corporation,
or any of its gaming affiliates, or any other action which the
Nevada Commission finds to be inconsistent with holding the
Registered Corporation's voting securities for investment
purposes only. Activities which are not deemed to be
inconsistent with holding voting securities for investment
purposes only include: (i) voting on all matters voted on by
stockholders; (ii) making financial and other inquiries of
management of the type normally made by securities analysts for
informational purposes and not to cause a change in its
management, policies or operations; and (iii) such other
activities as the Nevada Commission may determine to be
consistent with such investment intent. If the beneficial holder
of voting securities who must be found suitable is a corporation,
partnership or trust, it must submit detailed business and
financial information including a list of beneficial owners. The
applicant is required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of
suitability or a license within 30 days after being ordered to do
so by the Nevada Commission or the Chairman of the Nevada Board
may be found unsuitable. The same restrictions apply to a record
owner if the record owner, after request, fails to identify the
beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the
common stock beyond such period of time as may be prescribed by
the Nevada Commission may be guilty of a criminal offense. The
Company is subject to disciplinary action if, after it receives
notice that a person is unsuitable to be a stockholder or to have
any other relationship with the Company or the Corporate
Licensees, the Company (i) pays that person any dividend or
interest upon voting securities of the Company, (ii) allows that
person to exercise, directly or indirectly, any voting right
conferred through securities held by that person, (iii) pays
remuneration in any form to that person for services rendered or
otherwise, or (iv) fails to pursue all lawful efforts to require
such unsuitable person to relinquish his voting securities,
including, if necessary, the immediate purchase of said voting
securities for cash at fair market value. Additionally, the
Clark County Board has taken the position that it has the
authority to approve all persons owning or controlling the stock
of any corporation controlling a gaming license.
The Nevada Commission may, in its discretion, require the holder
of any debt securities of a Registered Corporation, to file
applications, be investigated and be found suitable to own the
debt security. If the Nevada Commission determines that a person
is unsuitable to own such security, then pursuant to the Nevada
Act, the Registered Corporation can be sanctioned, including the
loss of its approvals, if, without the prior approval of the
Nevada Commission, it (i) pays the unsuitable person any
dividend, interest or any distribution whatsoever; (ii)
recognizes any voting right by such unsuitable person in
connection with such securities; (iii) pays the unsuitable person
remuneration in any form; or (iv) makes any payment to the
unsuitable person by way of principal, redemption, conversion,
exchange, liquidation or similar transaction.
The Company is required to maintain a current stock ledger in
Nevada which may be examined by the Nevada Gaming Authorities at
any time. If any securities are held in trust by an agent or by
a nominee, the record holder may be required to disclose the
identity of the beneficial owner to the Nevada Gaming
Authorities. A failure to make such disclosure may be grounds
for finding the record holder unsuitable. The Company is also
required to render maximum assistance in determining the identity
of the beneficial owner. The Nevada Commission has the power to
impose a requirement that a Registered Corporation's stock
certificates bear a legend indicating that the securities are
subject to the Nevada Act. The Nevada Commission has imposed
this requirement on the Company.
The Company may not make a public offering of its securities
without the prior approval of the Nevada Commission if the
securities or proceeds therefrom are intended to be used to
construct, acquire or finance gaming facilities in Nevada, or to
retire or extend obligations incurred for such purposes. Any
such approval, if granted, does not constitute a finding,
recommendation or approval by the Nevada Commission or the Nevada
Board as to the accuracy or adequacy of the prospectus or the
investment merits of the securities offered. Any representation
to the contrary is unlawful. The Nevada Commission has also
imposed a requirement on the Company that it must receive the
prior administrative approval of the Nevada Board Chairman for
any offer for the sale of an equity security in a private
transaction.
Changes in control of the Company through merger, consolidation,
stock or asset acquisitions, management or consulting agreements,
or any act or conduct by a person whereby he obtains control, may
not occur without the prior approval of the Nevada Commission.
Entities seeking to acquire control of a Registered Corporation
must satisfy the Nevada Board and Nevada Commission in a variety
of stringent standards prior to assuming control of such
Registered Corporation. The Nevada Commission may also require
controlling stockholders, officers, directors and other persons
having a material relationship or involvement with the entity
proposing to acquire control, to be investigated and licensed as
a part of the approval process relating to the transaction.
The Nevada legislature has declared that some corporate
acquisitions opposed by management, repurchases of voting
securities and corporate defense tactics affecting Nevada
corporate gaming licensees, and Registered Corporations that are
affiliated with those operations, may be injurious to stable and
productive corporate gaming. The Nevada Commission has
established a regulatory scheme to ameliorate the potentially
adverse affects of these business practices on Nevada's gaming
industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming licensees and their
affiliates; (ii) preserve the beneficial aspects of conducting
business in the corporate form; and (iii) promote a neutral
environment for orderly governance of corporate affairs.
Approvals are, in certain circumstances, required from the Nevada
Commission before a Registered Corporation can make exceptional
repurchases of voting securities above the current market price
thereof and before a corporate acquisition opposed by management
can be consummated. The Nevada Act also requires prior approval
of a plan of recapitalization proposed by the Registered
Corporation's Board of Directors in response to a tender offer
made directly to the Registered Corporation's stockholders for
the purposes of acquiring control of the Registered Corporation.
License fees and taxes, computed in various ways depending on the
type of gaming or activity involved, are payable to the State of
Nevada, and to the counties and cities in which the Licensees'
respective operations are conducted. Depending upon the
particular fee or tax involved, these fees and taxes are payable
either monthly, quarterly or annually and are based upon either
(i) a percentage of the gross revenues received, (ii) the number
of gaming devices operated, or (iii) the number of games
operated. A casino entertainment tax is also paid by casino
operations where entertainment is furnished in connection with
the selling of food or refreshments. The Corporate Licensee's
that hold a license as an operator of a gaming device route, or a
manufacturer's or distributor's license also pay certain fees to
the State of Nevada.
Any person who is licensed, required to be licensed, registered,
required to be registered, or is under common control with such
persons (collectively "Licensees"), and who proposes to become
involved in a gaming venture outside of Nevada, is required to
deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of
investigation by the Nevada Board of their participation in such
foreign gaming. The revolving fund is subject to increase or
decrease in the discretion of the Nevada Commission. Thereafter,
Licensees are required to comply with certain reporting
requirements imposed by the Nevada Act. Licensees are also
subject to disciplinary action by the Nevada Commission if they
knowingly violate any laws of the foreign jurisdiction pertaining
to the foreign gaming operation, fail to conduct the foreign
gaming operation in accordance with the standards of honesty and
integrity required of Nevada gaming operations, engage in
activities that are harmful to the state of Nevada or its ability
to collect gaming taxes and fees, or employ a person in the
foreign operations who has been denied a license or finding of
suitability in Nevada on the ground of personal unsuitability.
The sale of alcoholic beverages at establishments operated by a
Corporate Licensee are subject to licensing, control and
regulation by applicable regulatory agencies. All licenses are
revocable and are not transferable. The agencies involved have
full power to limit, condition, suspend or revoke any such
license, and any such disciplinary action could (and revocation
would) have a material adverse affect upon the operations of the
Corporate Licensees.
Louisiana. The manufacture, distribution, servicing and
operation of video draw poker devices ("Devices") in Louisiana is
subject to the Louisiana Video Draw Poker Devices Control Law and
the Rules and Regulations promulgated thereunder (the "Louisiana
Act"). Licensing and regulatory control is provided by the Video
Gaming Division of the Gaming Enforcement Section of the Office
of State Police within the Department of Public Safety and
Corrections (the "Division"). The laws and regulations of the
Division are based upon a primary consideration of maintaining
the health, welfare and safety of the general public and upon a
policy which is concerned with protecting the video gaming
industry from elements of organized crime, illegal gambling
activities and other harmful elements as well as protecting the
public from illegal and unscrupulous gaming to ensure the fair
play of Devices.
Each of the indirect operating subsidiaries for the Company's
gaming operations in Louisiana, VSI and SVS, has been granted a
license as a Device owner by the Division. The other indirect
subsidiary of the Company, VDSI, has been granted a license as a
distributor by the Division. These gaming subsidiaries are
Louisiana Licensees under the terms of the Louisiana Act. The
licenses held by the Louisiana Licensees expire at midnight on
June 30 of each year and must be renewed annually through payment
of fees. All license fees must be paid on or before May 15 in
each year licenses are renewable.
The Division may deny, impose a condition on or suspend or revoke
a license, renewal or application for a license for violations of
any rules and regulations of the Division or any violations of
the Louisiana Act. In addition, fines for violations of gaming
laws or regulations may be levied against the Louisiana Licensees
and the persons involved for each violation of the gaming laws.
The issuance, condition, denial, suspension or revocation is a
pure and absolute privilege and is at the discretion of the
Division in accordance with the provisions of the Louisiana Act.
A license is not property or a protected interest under the
constitution of either the United States or the State of
Louisiana.
The Division has the authority to conduct overt and covert
investigations of any person involved directly or indirectly in
the video gaming industry in Louisiana. This investigation may
extend to information regarding a person's immediate family and
relatives and their affiliations with certain organizations or
other business entities. The investigation may also extend to any
person who has or controls more than a 5% ownership, income or
profits interest in an applicant for or holder of a license or
who is a key employee, or who has the ability to exercise
significant influence over the licensee. All persons or entities
investigated must meet all suitability requirements and
qualifications for a licensee. The Division may deny an
application for licensing for any cause which it may deem
reasonable. The applicant for licensing must pay a filing fee
which also covers the cost of the investigation.
In order for a corporation to be licensed by the Division, a
majority of the stock of the corporation must be owned by persons
who have been domiciled in Louisiana for a period of at least two
years prior to the date of the application.
Devices must meet strict specifications established by the
Division. The number of devices permitted depends on the type of
location at which the Devices are operated. Fees payable to the
Division include an application fee which is non-refundable, an
annual fee based upon a percentage of net revenues from the
operation of each Device, a Device owner's fee, a Device
operators fee, a license establishment fee and a Device owner's
franchise fee. All fees are payable in either quarterly or
annual installments depending on the fee being paid.
Mississippi. The ownership and operation of gaming devices in
Mississippi is subject to extensive state and local laws and
regulations, including the Mississippi Gaming Control Act (the
"Mississippi Act") and the regulations (the "Mississippi
Regulations") promulgated thereunder. The Mississippi Gaming
Commission (the "Mississippi Commission") oversees licensing and
regulatory compliance. Gaming in Mississippi can be legally
conducted only on vessels of a certain minimum size in navigable
waters of the Mississippi River or in waters of the State of
Mississippi which lie adjacent and to the south (principally in
the Gulf of Mexico) of the counties of Hancock, Harrison and
Jackson, and only in counties in Mississippi in which the
registered voters have not voted to prohibit such activities.
The voters in Jackson County, the southeastern-most county of
Mississippi, have voted to prohibit gaming in that county.
However, gaming could be authorized in Jackson County should the
voters fail to disapprove of gaming in that county in any
referendum, which could be held annually. The underlying policy
of the Mississippi Act is to ensure that gaming operations in
Mississippi are conducted (i) honestly and competitively, (ii)
free of criminal and corruptive influences and (iii) in a manner
which protects the rights of the creditors of gaming operations.
Gaming in the future may also be legally conducted on American
Indian lands in Mississippi as regulated in part by the 1988
Indian Gaming Regulatory Act, which activity will not be subject
to the Mississippi Act.
The Mississippi Act requires that a person (including any
corporation or other entity) must be licensed to conduct gaming
activities in Mississippi. A license will be issued only for a
specified location which has been approved as a gaming site by
the Mississippi Commission. The Company, through its interest in
Rainbow Casino-Vicksburg Partnership ("RCVP") must apply for
renewal of such licenses, which renewal cannot be assured. The
Mississippi Act also requires that each officer or director of a
gaming licensee, or other person who exercises a significant
influence over the licensee, either directly or indirectly, must
be found suitable by the Mississippi Commission. In addition,
any employee of the licensee which is directly involved in
gaming, must obtain a work permit from the Mississippi
Commission. The Mississippi Commission will not issue a license
or make a finding of suitability unless it is satisfied, only
after an extensive investigation paid for by the applicant, that
the persons associated with the gaming licensee or applicant for
a license are of good character, honesty and integrity, with no
relevant or material criminal record. In addition, the
Mississippi Commission will not issue a license unless it is
satisfied that the licensee is adequately financed or has a
reasonable plan to finance its proposed operations from
acceptable sources, and that persons associated with the
applicant have sufficient business probity, competence and
experience to engage in the proposed gaming enterprise. The
Mississippi Commission may refuse to issue a work permit to a
gaming employee (i) if the employee has committed larceny,
embezzlement or any crime of moral turpitude, or knowingly
violated the Mississippi Act or Mississippi Regulations, or (ii)
for any other reasonable cause. If an employee is denied a
license, the Company must terminate his or her employment.
The Mississippi Commission has the power to deny, limit,
condition, revoke and suspend any license, finding of suitability
or registration, or fine any person, as it deems reasonable and
in the public interest, subject to any opportunity for a hearing.
The Mississippi Commission may fine any licensee or person who
was found suitable up to $100,000 for each violation of the
Mississippi Act or the Mississippi Regulations, which is the
subject of an initial complaint, and up to $250,000 for each such
violation which is the subject of any subsequent complaint. The
Mississippi Act provides for judicial review of any final
decision of the Mississippi Commission by petition to a
Mississippi Circuit Court, but filing of such petition does not
necessarily stay any action by the Mississippi Commission pending
a decision by the Circuit Court.
Each gaming licensee must pay a license fee to the State of
Mississippi based upon "gaming receipts" (generally defined as
gross receipts less payouts to customers as winnings). The
license fee equals four percent of gaming receipts of $50,000 or
less per month, six percent of gaming receipts over $50,000 and
up to $134,000 per month and eight percent of gaming receipts
over $134,000 per month. The foregoing license fees are allowed
as a credit against any Mississippi State income tax liability
for the year paid. An additional license fee, equal to $100 for
each table game conducted or planned to be conducted on the
gaming premises, is payable to the State annually in advance.
Municipal and county fees may also be assessed and vary from
jurisdiction to jurisdiction. All taxes and fees must be paid
timely in order to retain a gaming license.The Mississippi Act
also imposes certain audit and record keeping laws and
regulations, primarily to ensure compliance with the Mississippi
Act, including compliance with the provisions relating to the
payment of license fees.
Under the Mississippi Regulations, a gaming licensee cannot be
publicly held, although an affiliated corporation, such as the
Company, may be publicly held so long as the Company registers
with and gets the approval of the Mississippi Commission. In
addition, approval of any subsequent public offerings of the
securities of the Company must be obtained from the Mississippi
Commission if any part of the proceeds from that offering are
intended to be used to pay for or reduce debt used to pay for the
construction, acquisition or operation of any gaming facility in
Mississippi.
Under the Mississippi Regulations, a person is prohibited from
acquiring control of a licensee without the prior approval of the
Mississippi Commission. Any person who, directly or indirectly,
or in association with others, acquires beneficial ownership of
more than five percent of a licensee must notify the Mississippi
Commission of this acquisition. The Mississippi Commission may
require that a person be found suitable if that person holds
between a five percent and ten percent ownership position and
must require that a person be found suitable if that person owns
more than ten percent of a licensee. Furthermore, regardless of
the amount of ownership, any person who acquires beneficial
ownership may be required to be found suitable if the Mississippi
Commission has reason to believe that the acquisition of such
ownership would be inconsistent with the declared policy of
Mississippi. Any person who is required to be found suitable must
apply for a finding of suitability from the Mississippi
Commission within 30 days after being requested to do so, and
must deposit with the State Tax Commission a sum of money which
is adequate to pay the anticipated investigatory costs associated
with such finding. Any person who is found not to be suitable by
the Mississippi Commission shall not be permitted to have any
direct or indirect ownership in the licensee. Any person who is
required to apply for a finding of suitability and fails to do
so, or who fails to dispose of his or her interest in the
licensee if found unsuitable, is guilty of a misdemeanor. If a
finding of suitability with respect to any person is not applied
for where required, or if it is denied or revoked by the
Mississippi Commission, the licensee is not permitted to pay such
person for services rendered, or to employ or enter into any
contract with such person.
Dockside casinos may be required to be moved to a "safe harbor"
in the event of a threatened hurricane. The appropriate county
civil defense director will determine when such movement is
required. In general, it is anticipated that casino vessels will
have to be moved in the event of a Class III or more severe
hurricane warning, where there is the possibility of 125 miles
per hour wind speeds. The movement of a casino barge will not
necessarily insure protection against damage or destruction by a
hurricane. Furthermore, the removal of a casino barge will
generally require several days, and as a consequence, the casino
barge will be out of business during that movement, even if no
hurricane strikes the casino site.
Any permanently moored vessel used for casino operations must
meet the fire safety standard of the Mississippi Fire Prevention
Code, the Life Safety Code and the Standards for the Construction
and Fire Protection of Marine Terminals, Piers and Wharfs of the
National Fire Protection Association. Additionally, any
establishment to be constructed for dockside gaming must meet the
Southern Standard Building Code or the local building code, if
such a local building code has been implemented at the casino's
site.
While unpowered and permanently moored vessels do not require
certification by the United States Coast Guard, the Mississippi
Commission has engaged the American Bureau of Shipping, an
independent consulting agency, which will inspect and certify all
casino barges with respect to stability and single compartment
flooding integrity, in accordance with Mississippi Regulations.
The laws and regulations permitting and governing Mississippi
casino gaming were adopted during 1990 and 1991, and the first
casinos opened in August 1992. Consequently, the interpretation
and application of Mississippi law and regulations may evolve
over time, and any such changes may have an adverse effect on
Mississippi licensees.
Additional Jurisdictions. The Company, in the ordinary course of
its business, routinely considers business opportunities to
expand its gaming operations into additional jurisdictions. Any
such expansion would subject the Company and, possibly, some or
all of its officers, directors, employees and stockholders, to
regulatory requirements in addition to those with which such
parties are presently obligated to comply.
As previously noted, the Company is currently attempting to
acquire Bally Gaming, International, Inc. which is licensed in
many states as a manufacturer of gaming devices. If the Company
is successful in its attempted acquisition, the Company will be
required to be licensed in each of these states.
Federal Registration. The operating subsidiaries of the Company
that are involved in gaming activities are required to file
annually with the Attorney General of the United States in
connection with the sale, distribution or operation of gaming
devices. All currently required filings have been made.
ITEM 2. PROPERTIES
The following table sets forth information regarding the
Company's leased properties (exclusive of space leases in
connection with its gaming device routes) as of June 30, 1995,
all of which are fully utilized unless otherwise noted:
Annual
Building Rental
Location Use Square Feet Payments
(In 000s)
Las Vegas, Nv. Executive offices, route 72,000 $ 486
operations and manufacturing
Washington, D.C. Administrative offices 400 31
New York, N.Y. Executive offices 4,650 279
Vicksburg, Ms. Casino administration offices 2,000 15
Las Vegas, Nv. Subleased office space 9,500 58
Reno/Sparks, Nv. Route operations 2,100 71
Carson City, Nv. Route operations 2,500 8
Fallon, Nv. Route operations 900 5
Elko, Nv. Route operations 1,000 8
Las Vegas, Nv. Route location 8,000 419
Tonopah, Nv. Casino Hotel 10,000 210
Las Vegas, Nv. (1) Casino 24,700 494
Las Vegas, Nv. Tavern 7,000 122
Las Vegas, Nv. Tavern 4,864 96
Las Vegas, Nv. (1) Tavern 4,300 81
Las Vegas, Nv. Tavern 3,500 88
Las Vegas, Nv. 4,200 54
Las Vegas, Nv. Tavern 4,225 80
Las Vegas, Nv. (2) Ground Lease 320
Sparks, Nv. (3) Ground Lease 4
New Orleans, La. Administrative offices & route 6,000 53
operations
(1) See discussion in Item 7. Management's Discussion and
Analysis of Financial Condition for changes in utilization
of these properties.
(2) Lease consists of ground lease for parking at the Trolley
Stop.
(3) Lease consists of long-term land lease for parking at the
Plantation.
In addition, the Company leases approximately 16 properties which
have been subleased in connection with its gaming device routes.
The properties range in size from approximately 1,750 square feet
to 7,700 square feet. The remaining terms of the leases range
from 5 months to 14 years with monthly payments ranging from
approximately $1,500 to $8,100. See Note 10 of Notes to
Consolidated Financial Statements for information as to the
Company's lease commitments with respect to the foregoing rental
properties. The Company believes its facilities are suitable for
its needs and the Company has no future expansion plans that
would make these properties inadequate.
The following table sets forth information regarding properties
owned by the Company as of June 30, 1995, all of which are fully
utilized unless otherwise noted:
Building
Location Use Square Feet (1)
(In 000s)
Reno/Sparks, Nv. Casino 35,000
Vicksburg, Mississippi Casino 24,000
Las Vegas, Nv. (1) Vacant - Casino/Tavern 7,700
Las Vegas, Nv. Tavern/Land 5,000
North Las Vegas, Nv. Parking ---
(1) See discussion in Item 7. Management's Discussion and
Analysis of Financial Condition for changes in utilization
of these properties.
ITEM 3. LEGAL PROCEEDINGS
On June 19, 1995, the Company publicly proposed a negotiated
acquisition of Bally Gaming International, Inc. ("BGII") for
$12.50 per share of BGII common stock. Prior to making this
offer, the Company had acquired 500,000 shares of BGII stock on
the open market and at June 30, 1995 held 1,000,000 shares
(approximately 9.3% of BGII's total outstanding shares, based on
BGII's most recent public filings) which it acquired at an
average cost of approximately $10.41 per share. Under the
proposed terms of the offer, approximately 60% of BGII shares not
held by the Company would be acquired for cash with the remainder
exchanged for shares of the Company's common stock. The offer
was contingent upon satisfactory due diligence, regulatory and
stockholder approval and reasonable financing. At the time the
offer was made public, the Company requested expedited due
diligence, subject to a confidentiality agreement. BGII had
previously announced a planned merger with WMS Industries, Inc.
("WMS") which included an exclusive period for WMS to negotiate
the terms of that proposed merger. WMS's exclusive negotiating
period had expired several weeks before the Company's proposal
was made without announcement or action on the part of BGII or
WMS. On July 25, 1995, after being refused due diligence access
and the announcement by BGII that a definitive agreement had been
reached to merge with WMS, the Company announced its intent to
make a tender offer for BGII. The tender offer was on largely
the same terms as the originally proposed acquisition. On the
same date, the Company announced it had filed litigation in
Delaware Chancery Court requesting that the court require BGII to
grant the Company due diligence access, enjoin BGII from
proceeding with the WMS merger (including a provision therein
requiring the sale of BGII's German operations) and declare the
breakup fee provided for in the WMS merger to be invalid. The
Company indicated that it would increase the price per share of
BGII stock to $13.00 per share if the breakup fee was declared
invalid. The tender offer was conditioned upon the Company being
validly tendered a number of shares of BGII stock, which combined
with its own holdings of such stock, would give the Company a
majority of BGII's outstanding shares. The tender offer
commenced on July 28, 1995. Subsequently, the Company announced
its intention to proceed with a consent solicitation to elect a
majority of independent directors to the BGII Board of Directors.
On August 14, 1995, the Company, BGII and WMS jointly announced
an agreement whereby the parties would hold in abeyance all
activities related to pending litigation until September 1, 1995,
refrain from commencing new litigation until that same date, BGII
would schedule its annual shareholder meeting for consideration
of the proposed WMS merger and the election of directors on
October 30, 1995, and the Company would extend the expiration
date of the tender offer until September 12, 1995 and refrain
from soliciting proxies until September 1, 1995. On September 1,
1995, the Company disclosed that it had obtained firm financing
commitments to fund the tender offer and that such commitments
were not conditioned on due diligence of BGII. Accordingly, the
Company extended the expiration date of its tender offer to
September 29, 1995. BGII and WMS filed lawsuits against the
Company alleging numerous public misrepresentations had been made
by the Company with regards to the WMS-BGII agreement, the
Company's tender offer and the level of cooperation of BGII's
board of directors.
The Company and its directors are currently defendants in a
lawsuit filed by a stockholder. This suit seeks class action
status and alleges several breaches of fiduciary duty by the
Company's current and former directors. The Company believes
this lawsuit was filed to thwart its attempted acquisition of
BGII, the allegations contained therein are without merit and
intends to vigorously defend itself against such claims. In the
initial ruling on this case, the plaintiff's motion for expedited
discovery was denied by the U.S. District Court of Nevada. The
District Court also stated that it is unlikely that the plaintiff
in the case would be able to represent other shareholders fairly
and adequately as defined by law.
The Company is also a party to various lawsuits relating to
routine matters incidental to its business. Management does not
believe that the outcome of such litigation, including the
matters above, in the aggregate, will have a material adverse
effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended June 30, 1995,
no matter was submitted to a vote of the Company's stockholders,
through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS
The Common Stock is traded on the Nasdaq National Market under
the symbol "ALLY". The following table sets forth the high and
low closing sales prices of the Common Stock as reported by
Nasdaq for the periods indicated.
Price Range of
Common Stock
High Low
Fiscal Year Ended June 30, 1994
1st Quarter $ 9.88 $6.75
2nd Quarter 11.88 7.75
3rd Quarter 10.13 6.75
4th Quarter 7.25 5.13
Fiscal Year Ended June 30, 1995
1st Quarter $ 8.50 $5.13
2nd Quarter 7.88 5.13
3rd Quarter 8.00 5.38
4th Quarter 6.50 4.25
As of September 25, 1995 the Company had approximately 1,674
holders of record of its Common Stock.
The Company has never declared or paid cash dividends on its
Common Stock. The Company intends to follow a policy of
retaining earnings, if any, to finance growth of its business and
does not anticipate paying any cash dividends in the foreseeable
future. The declaration and payment of future dividends on the
Common Stock will be at the sole discretion of the Board of
Directors and will depend on the Company's profitably and
financial condition, capital requirements, statutory and
contractual restrictions, future prospects and other factors
deemed relevant.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data have been
derived from the audited financial statements of the Company for
the years ended June 30, 1991, 1992, 1993, 1994 and 1995. The
table should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations"
and the Consolidated Financial Statements and Notes thereto.
<TABLE>
<CAPTION>
Fiscal Years Ended June 30
1991 1992 1993 1994 1995
(In Thousands, Except Per Share Amounts)
Statements of Operations Data
<S> <C> <C> <C> <C> <C>
Revenues:
Gaming
Routes $ 77,150 $ 77,940 $ 96,282 $102,830 $106,827
Casinos and taverns 11,281 11,560 12,526 15,679 21,287
Food and beverage sales 3,120 3,376 4,184 4,480 3,847
Net equipment sales (1) 214 379 99 65 27
91,765 93,255 113,091 123,054 131,988
Costs and expenses:
Cost of gaming
Routes 58,299 58,585 72,614 76,332 79,875
Casinos and taverns 8,528 8,459 8,667 11,871 11,436
Cost of food and beverage 2,249 2,367 2,876 3,084 2,795
Cost of equipment sales 151 284 49 20 12
Selling, general & administrative 8,059 8,950 12,667 13,555 14,633
Business development costs --- --- 900 1,192 7,843
Corporate administrative expenses 7,567 5,290 6,191 7,882 9,735
Bad debt expense 4,845 539 461 705 400
Write-off of inventory, intangibles
and other assets 4,982 --- --- --- ---
Loss on abandoned casinos 7,847 2,307 --- 3,713 ---
Loss on abandoned taverns --- --- --- 2,638 ---
Depreciation and amortization 7,092 7,355 8,718 9,530 9,520
Total costs and expenses 109,619 94,136 113,143 130,522 136,249
Operating loss (17,854) (881) (52) (7,468) (4,261)
Other income (expense)
Interest income 1,750 1,324 998 2,084 2,798
Interest expense (4,663) (4,505) (5,046) (6,830) (8,133)
Other, net (1,007) (618) 450 (673) (890)
Loss before taxes (21,774) (4,680) (3,650) (12,887) (10,486)
Income tax (expense) benefit 5,958 --- --- (241) (265)
Net loss $ (15,816) $ (4,680) $ (3,650) $(13,128) $(10,751)
Net loss per common share $ (1.73) $ (0.51) $ (0.38) $ (1.28) $ (0.95)
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA (continued)
<TABLE>
<CAPTION>
As of June 30
1991 1992 1993 1994 1995
Balance Sheet Data
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 5,774 $ 10,239 $ 9,580 $ 37,085 $ 13,734
Securities available for sale --- --- --- 12,489 23,680
Net working capital 10,450 11,557 7,991 50,926 31,552
Total assets 79,024 75,594 73,768 119,416 126,348
Total long term debt,
including current maturities 44,450 43,282 44,798 90,726 101,397
Total stockholders' equity 27,008 23,660 22,665 15,099 9,985
</TABLE>
(1) Includes sales to related parties of $86 (1991), $236 (1992),
$2 (1993), $6 (1994) and $0 (1995).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
At June 30, 1995, the Company had working capital of
approximately $31,552,000, a decrease of approximately
$19,374,000 from June 30, 1994. The decrease in working capital
is primarily in cash and cash equivalents which were used to fund
activities in connection with the Company's growth strategy. As
of June 30, 1995, the Company had approximately $37,414,000 in
cash, cash equivalents and securities available for sale.
During fiscal 1995, the Company incurred approximately $7,843,000
in expenses associated with pursuit of the Company's business
strategy. The Company's strategy is to use its strengthened
management team, diversified gaming expertise and business and
investment community relationships to develop new opportunities
in the operation of land-based (including Native American owned),
dockside and riverboat casinos, gaming systems and technology and
the supply and management of gaming devices.
On July 16, 1994 the Rainbow Casino in Vicksburg, Mississippi
permanently opened for business. In connection with the
completion of the casino and the acquisition of its original 45%
limited partnership interest, through a wholly-owned subsidiary,
the Company funded a $3,250,000 advance to The Rainbow Casino
Corporation ("RCC") on the same terms as RCC's financing from
Hospitality Franchise Systems, Inc. ("HFS"). On March 29, 1995,
the Company consummated certain transactions whereby the Company
acquired from RCC the controlling general partnership interest in
RCVP and increased its partnership interest. In exchange for the
assumption by National Gaming Mississippi, Inc. ("NGM"), a
subsidiary of National Gaming Corporation, of approximately
$1,140,000 of liabilities (plus a financing fee payable to HFS)
related to the completion of certain incomplete elements of the
project which survived the opening of the casino (for which RCC
was to have been responsible, but failed to satisfy), a related
$652,000 cash payment by the Company to NGM and commitments by
the Company and NGM to fund additional financing required to
complete the project: (i) a subsidiary of the Company became the
general partner and RCC became the limited partner and (ii) the
respective partnership interests were adjusted. As a result of
these transactions, RCVP assumed $1,304,000 of new debt of which
50% was payable to the Company. Under the adjusted partnership
interests, RCC is entitled to receive 10% of the net available
cash flows after debt service and other items, as defined, (which
amount shall increase to 20% of cash above $35,000,000 (i.e.,
only on such incremental amount)), for a period of 15 years, such
period being subject to one year extensions for each year in
which a minimum payment of $50,000 is not made. In addition, if
during any continuous 12-month period until December 31, 1999 the
casino achieves earnings from the project of at least $10.5
million, before deducting depreciation, amortization, certain
debt payments and substantially all taxes, then the Company will
be obligated to pay to certain principals of the original
partnership an amount aggregating $1 million in cash or shares of
the Company's Common Stock.
The Company and Casino Magic Corporation, through wholly owned
subsidiaries, are members in Kansas Gaming Partners, L.L.C.
("KGP') and Kansas Financial Partners, L.L.C. ("KFP"), both
Kansas limited liability companies. Under an option agreement
(the "Option Agreement") granted to KGP by Camptown Greyhound
Racing, Inc. ("Camptown") and The Racing Association of Kansas-
Southeast ("TRAK Southeast"), KGP has been granted the exclusive
right, which right expires on September 13, 2013, to operate
gaming devices and/or casino-type gaming at Camptown's racing
facility in Frontenac, Kansas if and when such gaming is
permitted in Kansas. In December 1994, Camptown received a
$3,205,000 loan from Boatmen's Bank which was guaranteed by KFP.
The Company and Casino Magic Corporation each invested $1,580,000
in KFP which was used to purchase a certificate of deposit to
collateralize its guaranty. Construction of Camptown's racing
facility has been completed and the facility opened for business
in May 1995. The racing facility was temporarily closed on
November 5, 1995 due to poor financial results. Camptown filed
for reorganization under Chapter 11 of the U.S. Bankruptcy Code
in January 1996 and has stated an intention to reopen for
business following bankruptcy reorganization. Boatmen's Bank
demanded payment of the Camptown loan from KFP under the terms of
the guaranty. KFP paid the loan and Boatmen's Bank returned KFP's
certificate of deposit and KFP assumed Boatmen's Bank's position
in the loan to Camptown which is secured by a second mortgage on
Camptown's greyhound racing facility in Frontenac, Kansas. TRAK
Southeast and Camptown continue to be bound by the Option
Agreement. KFP intends to vigorously pursue all of its rights and
remedies which may include, among other things, seeking authority
from the bankruptcy court to commence a foreclosure action. In
the case of a foreclosure action, KFP would be required to assume
or pay the existing first mortgage of approximately $2,000,000 if
KFP becomes the purchaser at any such sale. The Company intends
to continue to monitor its investment in KFP. The Company
believes that the Kansas legislature may consider at least two
gaming bills this session. One bill, if approved by two thirds of
both houses of the Kansas legislature, would call for a public
vote to amend the Kansas constitution to allow slot machines at
up to two gaming locations in each legislative district, with one
location being reserved for any licensed pari-mutuel location in
the district. The second bill, if passed by a majority of both
houses of the Kansas legislature, would allow, subject to local
option election of the citizens in the county, slot machines at
licensed pari-mutuel race tracks.
Cash provided by operations for fiscal 1995 decreased
approximately $8,105,000 from amounts reported for fiscal 1994.
Included in the prior year's cash flows from operations was a non-
recurring gain of $3,600,000 associated with the termination of
the Company's letter agreement with Capital Gaming International,
Inc. and $6,351,000 of charges related to the Company's decision
to exit the downtown Las Vegas gaming market and dispose of its
tavern operations. Exclusive of these prior year items,
expenditures related to supporting the Company's bisiness
strategy increased approximately $3,051,000. Long-term accrued
expenses decreased by approximately $1,031,000 as the Company
paid rent and other exit expenses against the amounts accrued in
fiscal 1994 as noted above. The remaining change in accrued
expenses accounted for a use of cash in the amount of $4,710,000.
These uses of cash were partially offset by an increase in cash
flows from operations of approximately $2,666,000 from the
Company's ongoing business operations and an operating cash
contribution of approximately $3,089,000 from the first year of
operations by the Rainbow Casino. Significant non-cash items
added back to cash flows from operations for 1995 include
$1,313,000 in non-cash compensation expense and $1,075,000
related to certain service contracts and termination costs.
Cash flows used for investing activities in fiscal year 1995
decreased by $5,651,000 from the prior year. Net collections on
receivables improved by $2,605,000 compared to fiscal 1994 as
receivable activity returned to historical norms. In fiscal 1994,
the Company funded approximately $7,250,000 in loans to Capital
Gaming International Inc. and the original general partner in
RCVP which additions were partially offset by increased
collections of receivables related primarily to the collection of
the Capital Gaming loan in fiscal 1994.
Cash flows from financing activities in fiscal year 1995 declined
$48,402,000 from fiscal 1994. In the prior year, the Company
completed the private placement of $85,000,000 aggregate
principal amount of its 7.5% Convertible Subordinated Debentures
due 2003 ("Debentures"). Concurrent with the closing of the
issuance of the Debentures, Kirkland Ft. Worth Investment
Partners, L.P. ("KFW") invested $5,000,000 in the Company in
exchange for 1,333,333 shares of the Company's Non-Voting Junior
Convertible Special Stock and warrants to purchase up to
2,750,000 shares of Common Stock, subject to certain conditions.
A portion of the net proceeds from these transactions was used to
repay previously existing debt and accrued interest of
approximately $38,245,000.
Earnings before interest, taxes, depreciation, and amortization
("EBITDA") as a percent of the related revenues changed for
Nevada gaming machine management operations from 15.3% in fiscal
1994 to 16.7% in fiscal 1995 and for Louisiana gaming machine
management operations from 18.9% to 21.5% for the same periods.
EBITDA as a percent of revenues for the casino operations
(excluding discontinued operations) excluding certain one-time
charges, was 18.2% in fiscal 1994 and 23.3% in fiscal 1995.
EBITDA should not be construed as an alternative to net income or
any other GAAP measure of performance as an indicator of cash
flows or as a measure of liquidity. Management believes that
EBITDA is a useful adjunct to net income and other GAAP
measurements and is a conventionally used financial indicator.
Management believes the Company's present working capital and
funds generated from operations will be sufficient to meet its
existing commitments, debt payments and other obligations as they
become due. As discussed in previous reports, however, it
remains a part of the Company's business strategy to seek
additional gaming opportunities, including opportunities in which
its route and casino experience may be applicable. As part of
its business activities, the Company is regularly involved in the
identification, investigation and development of such
opportunities. Accordingly, in order to support such activities,
the Company may in the future elect to issue additional debt or
equity securities if and when appropriate opportunities become
available on terms satisfactory to management.
Results of Operations:
Fiscal 1995 Compared with Fiscal 1994
Revenues
Total revenues for the fiscal year ended June 30, 1995 were
approximately $131,988,000, an increase of $8,934,000 (7.3%) over
those for fiscal 1994. Revenues from all gaming route operations
increased $3,997,000 (3.9%) to approximately $106,827,000 in
fiscal 1995. Revenues from route operations in the state of
Louisiana declined $1,796,000 (10.3%) primarily as a result of
increased competition from riverboat operations as well as the
opening of a land based casino in New Orleans. Revenue from
Nevada route operations increased approximately $5,739,000 (6.7%)
over those for the same period last year. The increase in the
Nevada gaming route revenues was attributable to a $2.15 increase
in the average net win per gaming device per day in fiscal 1995
compared to fiscal 1994 (accounting for an increase of
approximately $4,042,000 of such increase) and an increase in the
weighted average number of gaming devices on location during
fiscal 1995 as compared to fiscal 1994 (accounting for an
increase of approximately $1,751,000). Revenues from casino and
tavern operations, including food and beverage sales, increased
approximately $4,975,000 (24.6%) during fiscal 1995 as compared
to those for the prior year as revenues recognized from the
Rainbow Casino, which were consolidated beginning March 29, 1995,
exceeded the revenues lost with the closing of the Company's
properties in downtown Las Vegas and the termination of the
Company's lease at the Royal Casino.
Costs and Expenses
Costs of Revenues
Cost of gaming route revenues for the fiscal year ended June 30,
1995 increased $3,543,000 (4.6%) over that for fiscal 1994.
Costs of revenues for route operations in Louisiana decreased
$1,199,000 (a decrease of 10.7% from last year) as revenues
declined primarily as a result of increased competition in that
market. As a percent of related revenues, Louisiana route costs
of revenues remained relatively constant. Cost of gaming
revenues for Nevada gaming route revenues increased $4,742,000
(7.3%) as compared to the prior year and increased slightly as a
percent of Nevada gaming route revenues due primarily to
increased costs associated with additional and renewed space
lease contracts. Cost of route revenues includes rents under
both space lease and revenue sharing arrangements, gaming taxes
and direct labor, including related taxes and benefits. The cost
of casino and tavern revenues, including the cost of food and
beverage sales, decreased $724,000 (4.8%) compared to fiscal 1994
primarily due to the closing of the Company's properties in
downtown Las Vegas and the termination of the Company's lease at
the Royal Casino. These decreases were partially offset by
Rainbow Casino costs of revenues which were consolidated
beginning in March 1995. Cost of casino and tavern revenues
includes cost of goods sold, gaming taxes, rent and direct labor
expenses, including taxes and benefits. Although the gross
margin percentage for Nevada operations declined slightly during
fiscal 1995, the decline was completely offset by the addition of
the Rainbow Casino and a small improvement in the Louisiana gross
margin percentage. As a result, the total cost of revenues as a
percentage of total revenues declined by 2.9% compared to fiscal
1994.
Expenses
For fiscal 1995, the Company incurred development costs
associated with pursuing the Company's long term growth strategy
of approximately $7,843,000, an increase of approximately
$6,651,000 (558.0%) from fiscal 1994. Included in the development
costs for fiscal 1995 was $1,669,000 of costs related to the
merger with Bally Gaming International, Inc. Included as an
offset to development costs for fiscal 1994 was a non-recurring
gain of $3,600,000 related to the Company's effort to acquire
Capital Gaming International, Inc. Prior year development costs
also include certain significant expenses associated with the
Company's purchase of NAI. Development costs include salaries
and wages, related taxes and benefits, professional fees, travel
expenses, payments to third parties for business development
options and other expenses associated with supporting the
Company's long-term growth strategy. With the exception of the
significant costs expected to be incurred in conjunction with the
merger with Bally Gaming International, Inc. The Company expects
to continue to incur a significant level of development costs
although at a reduced level compared to fiscal 1995.
Corporate administrative expenses for fiscal 1995 were
approximately $9,735,000, an increase of $1,853,000 over the same
amounts for fiscal 1994. The primary cause for the increase was
$1,331,000 in compensation expense recognized upon the issuance
of 250,000 shares of Common Stock to Steve Greathouse, the
Company's President, Chief Executive Officer and Chairman of the
Board, in connection with his employment agreement. Also
contributing to the increase in corporate administrative expenses
are $485,000 of expenses related to certain service contracts and
termination costs. Corporate administrative expenses include
salaries and wages, related taxes and benefits, professional fees
and other expenses associated with maintaining the corporate
office and providing centralized corporate services for the
Company.
Exclusive of the development and corporate expenses noted above,
selling, general and administrative expenses for fiscal 1995
increased $1,078,000 (7.9%) from the prior year. Selling,
general and administrative expenses related to gaming route
operations decreased $1,340,000 (13.8%) from fiscal 1994.
Selling, general and administrative expenses for Louisiana route
operations declined approximately $660,000 (23.8%) as staff
reductions and cost containment measures were implemented to
counter increased competition in that market. The same costs for
Nevada route operations decreased $680,000 (9.8%) as the benefit
of staff reductions and cost controls taken in late fiscal 1994
was realized. Selling, general and administrative costs
increased for casino and tavern operations by $1,595,000 (44.0%)
from the prior year. The acquisition of the Rainbow Casino,
which contributed $1,984,000 to the increase, was partially
offset by the closing of the Company's downtown Las Vegas
properties and the termination of the lease at the Royal Hotel.
Also contributing to the increase in selling, general and
administrative expenses were $478,000 of expenses related to
certain service contracts and termination costs. Selling,
general and administrative expenses may be subject to further
increases.
In fiscal 1994, due to continuing losses from operations,
negative cash flows and incompatibility with the Company's long-
term growth strategy, the Company's Board of Directors resolved
to 1) exit the downtown Las Vegas gaming market and 2) dispose of
the currently operated small independent tavern operations.
Based on these decisions, the Company recognized total expenses
of approximately $5,883,500 in fiscal 1994. As a result of the
decision to exit the downtown Las Vegas gaming market, in
September 1994, the Company substantially reduced operations at
both the Trolley Stop Casino and Miss Lucy's Gambling Hall &
Saloon. Included in the 1994 statements of operations are total
expenses of approximately $3,246,000 related to these actions.
The total charge included approximately $488,000 related to the
write-down of assets and approximately $2,758,000 representing
primarily the present value of the future lease payments net of
estimated future sublease income. The decision to withdraw from
the tavern business resulted in expenses of approximately
$2,638,000 being recognized in fiscal 1994. Approximately
$1,813,000 of the total amount was related to the write down of
assets while approximately $825,000 represented primarily the
present value of the future lease payments net of estimated
future sublease income.
On December 17, 1993, the Company incurred a fire loss at the
Fairgrounds Race Course in New Orleans, Louisiana where the
Company operated 199 gaming devices prior to the fire (of which
193 were destroyed by the fire) through its controlled
subsidiary, Video Services, Inc. The Company was fully insured
for all equipment, leasehold improvements, other assets and
business income with the exception of approximately $46,000 in
deductibles. During fiscal 1995, the Company recorded
approximately $247,000 of income from business interruption
insurance proceeds compared to $241,000 of such proceeds in the
prior year. The Company is discussing settlement of additional
business interruption claims with the insurance carrier. The
Company has also received insurance proceeds based on the
replacement value of the assets destroyed in the fire and,
therefore, recognized a gain of approximately $156,000 which is
included in other income in fiscal 1994.
Fiscal 1994 Compared with Fiscal 1993
Revenues
Total revenues for the fiscal year ended June 30, 1994 were
approximately $123,054,000 for fiscal 1994 an increase of
$9,963,000 (8.8%) over those for fiscal 1993. Revenues from all
gaming route operations increased $6,548,000 (6.8%) to
approximately $102,830,000 in fiscal 1994. Route operations in
the state of Louisiana contributed $5,222,000 (an increase of
42.9%) to the overall increase in route revenues as the Company
continued to experience increasing demand in that relatively
young market. Revenue from Nevada route operations increased
approximately $1,326,000 (1.6%) over those for the same period
last year. The increase in the Nevada gaming route revenues was
attributable to a $1.30 increase in the average net win per
gaming device per day in fiscal 1994 compared to fiscal 1993
(accounting for an increase of approximately $2,608,000 of such
increase) which was partially offset by a decrease in the
weighted average number of gaming devices on location during
fiscal 1994 as compared to fiscal 1993 (accounting for a decrease
of approximately $1,282,000). Revenues from casino and taverns
increased approximately $3,449,000 (20.6%) during fiscal 1994 as
compared to those for the prior year due to the continued
expansion of casino operations and operating additional troubled
tavern locations.
Costs and Expenses
Costs of Revenues
Cost of gaming route revenues for the fiscal year ended June 30,
1994 increased $3,718,000 (5.1%) over that for fiscal 1993.
Route operations in Louisiana contributed $2,854,000 (an increase
of 40.6% from last year) to the overall increase. Cost of gaming
revenues for Nevada gaming route revenues increased $864,000
(1.3%) as compared to the prior year. The increase to cost of
Nevada route revenues was primarily due to an increase in
location operators' share of gaming revenues caused by replacing
a large space lease contract with revenue-sharing arrangements.
Cost of route revenues includes rents under both space lease and
revenue sharing arrangements, gaming taxes and direct labor,
including related taxes and benefits. The cost of casino and
tavern revenue increased $3,412,000 (29.6%) compared to fiscal
1993 primarily due to the first full year of operations of two
small casinos and the first full year of operating the hotel and
food and beverage operations at the Mizpah Hotel and Casino.
Previously, the Company had operated only the casino at the
Mizpah, but in January, 1993 began operating the entire facility
including food and beverage operations to insure its availability
for the casino. Cost of casino and tavern revenues includes cost
of goods sold, gaming taxes, rent and direct labor expenses,
including taxes and benefits. Although the gross margin
percentage from Nevada operations declined during fiscal 1994,
the decline was offset by increases in the Louisiana operating
margin percentage. As a result, the combined cost of gaming
revenues as a percentage of gaming revenues remained relatively
constant from fiscal 1993 to fiscal 1994.
Expenses
In August 1994, due to continuing losses from operations,
negative cash flows and incompatibility with the Company's long-
term growth strategy, the Company's Board of Directors resolved
to 1) exit the downtown Las Vegas gaming market and 2) dispose of
the currently operated small independent tavern operations.
Based on these decisions, the Company recognized total expenses
of approximately $5,883,500 in fiscal 1994. As a result of the
decision to exit the downtown Las Vegas gaming market, in
September 1994, the Company substantially reduced operations at
both the Trolley Stop Casino and Miss Lucy's Gambling Hall &
Saloon. Included in the 1994 statements of operations are total
expenses of approximately $3,246,000 related to these actions.
The total charge included approximately $488,000 related to the
write-down of assets and approximately $2,758,000 representing
primarily the present value of the future lease payments net of
estimated future sublease income. The decision to withdraw from
the tavern business resulted in expenses of approximately
$2,638,000 being recognized in fiscal 1994. Approximately
$1,813,000 of the total amount was related to the write down of
assets while approximately $825,000 represented primarily the
present value of the future lease payments net of estimated
future sublease income.
The Company's lease at the Mizpah Hotel and Casino ("Mizpah") has
a remaining lease term of approximately 8.5 years with an option
on the Company's behalf to terminate the lease arrangement at any
time after December 31, 1995 with 120 days notice. In September
1994, the Company notified the landlord of the Mizpah of its
intent to exercise the termination clause of its lease at the
earliest possible date of January 1, 1996 and give 120 days
notice at that time. As a result of this decision, the Company
recognized additional charges of $467,500 in fiscal 1994.
Also included in selling, general and administrative expenses for
fiscal 1994 are development costs associated with pursuing the
Company's long term growth strategy of approximately $1,192,000.
These developmental costs include approximately $4,792,000 in
legal fees, travel expenses and other expenses associated with
supporting the Company's long-term growth strategy, which
expenses are partially offset by the $3,600,000 recovered under
the Capital Gaming termination agreement. Fiscal 1994 was the
first year in which significant funds were expended in pursuit of
this strategy.
Exclusive of the reserves, write downs and development expenses
noted above, selling, general and administrative expenses for
fiscal 1994 increased $1,679,000 (8.5%) from the prior year. The
primary causes for the increase include a $400,000 fiscal 1994
bonus granted to Shannon L. Bybee as part of the restructuring of
his employment with the Company, $350,000 in fees incurred under
the one year consulting contract with Carole A. Carter, the
former President and Chief Operating Officer of the Company,
continued expansion of the Louisiana route operations which
contributed approximately $546,000 to the overall increase and
$274,000 of overall increases in Nevada route operations. The
general and administrative costs for casinos and taverns were
$3,622,000 or 18.0% of related revenues for fiscal 1994 as
compared to $3,511,000 or 21.0% for fiscal 1993. The same costs
for gaming device route operations were $9,736,000 or 9.5% of
revenues for fiscal 1994 and $8,916,000 or 9.3% of revenues for
fiscal 1993.
Bad debt expense in fiscal 1994 increased 52.9% to approximately
$705,000 as compared to the 1993 year expense of $461,000 due
primarily to the financial difficulties of a particular customer
in Northern Nevada.
On December 17, 1993, the Company incurred a fire loss at the
Fairgrounds Race Course in New Orleans, Louisiana where the
Company operated 199 gaming devices prior to the fire (of which
193 were destroyed by the fire) through its controlled
subsidiary, Video Services, Inc. The Company is fully insured
for all equipment, leasehold improvements, other assets and
business income with the exception of approximately $46,000 in
deductibles. Through June 30, 1994, the Company had recorded
approximately $241,000 of income from business interruption
insurance proceeds. The Company will continue to receive
proceeds under this policy while the Fairgrounds Race Course is
rebuilt. The Company has also received insurance proceeds based
on the replacement value of the assets destroyed in the fire and,
therefore, recognized a gain of approximately $156,000 which is
included in other income in fiscal 1994.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements, including the
notes thereto, and supplementary financial information are listed
in Part IV, Item 14, of this Report and included after the
signature page beginning at page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item regarding the
identification and background of the Company's directors is
incorporated by reference to the Proxy Statement which will be
filed with the Securities and Exchange Commission within 120 days
of the end of the Company's fiscal year covered by this report.
As to those executive officers and significant employees of the
Company and its subsidiaries at June 30, 1995 and the subsequent
dates noted, who, except as noted, are not directors, of the
Company, the following information is provided:
Name Age Position
Steven Greathouse 44 Chairman of the Board, President and
Chief Executive Officer
Shannon L. Bybee 56 Executive Vice President - Government Affairs
Anthony L. DiCesare 33 Executive Vice President - Development
John W. Alderfer 51 Sr.Vice President -Finance and Administration,
Cheif Financial Officer and Treasurer
David D. Johnson 44 Sr.Vice President - Law and Government,
Secretary and Corporate Legal Counsel
Robert L. Miodunski 44 Sr.Vice President - Nevada Route Group
Robert L. Saxton 41 Vice President - Casino Group
Robert M. Hester 39 Vice President - Human Resources and
Administration
Robert A. Woodson 45 Vice President - Regulatory Compliance
Johnann F. McIlwain 48 Vice President - Marketing
Steve Greathouse joined the Company as President and Chief
Executive Officer in August 1994 and was elected Chairman of the
Board of Directors in March 1995. Mr. Greathouse, who has held
various positions in the gaming industry since 1974, most
recently served as the president of Harrah's Casino Hotels
Division of the Promus Companies. In this position, Mr.
Greathouse had responsibility for Harrah's resorts in Las Vegas,
Laughlin, Reno, Lake Tahoe and Atlantic City. From July 1991 to
September 1993 Mr. Greathouse served as president and chief
operating officer of Harrah's Southern Nevada, overseeing the
operations of Harrah's Las Vegas and Harrah's Laughlin, then the
two largest hotel-casinos in the Harrah's chain. Mr. Greathouse
is an active member and has served as the Chairman of the Board
of the Nevada Resort Association and is on the Executive
Committee of United Way. He has also served as a member of the
Board of Directors of the Las Vegas Convention and Visitors
Authority and on the Executive Committee of the Nevada
Development Authority. Mr. Greathouse is a graduate of the
University of Missouri.
Mr. Bybee joined the Company in July 1993 as President and Chief
Operating Officer. In July 1994, Mr. Bybee assumed the roles of
Executive Vice President - Government Affairs and Special Advisor
to the Board of Directors. Additionally, Mr. Bybee took a
position with the William F. Harrah College of Hotel
Administration and the UNLV International Gaming Institute at the
University of Nevada, Las Vegas. Mr. Bybee also currently serves
as a member of the board of directors of The Claridge Hotel and
Casino Corporation, a position he has held since August 1988.
Prior to his association with the Company, Mr. Bybee had served
as Chief Executive Officer of The Claridge Hotel and Casino
Corporation since August 1989. From 1983 to 1987 Mr. Bybee
served as Senior Vice President and from 1978 to 1981 as Vice
President of Golden Nugget, Inc. (now Mirage Resorts, Inc.),
which operated the Golden Nugget Casino-Hotel in Atlantic City
and operates the Mirage Casino and the Golden Nugget Casino-Hotel
in Las Vegas, Nevada. From 1981 to 1983, Mr. Bybee served as
President of GNAC Corporation which operated the Golden Nugget
Casino-Hotel in Atlantic City. Prior to joining Golden Nugget,
Inc. in 1978, Mr. Bybee practiced law for over three years in the
Las Vegas firm of Hilbrecht, Jones, Schreck and Bybee. Prior
thereto, Mr. Bybee served on the Nevada Gaming Control Board for
four and one-half years commencing in 1971. Mr. Bybee has
served as Chairman of the Gaming Law Committee, General Practice
Section, of the American Bar Association. He is a founder and
past President of the International Association of Gaming
Attorneys ("IAGA") and is currently a director of IAGA. Mr.
Bybee was Chairman of the Atlantic City Convention and Visitors
Bureau from 1983 to 1987. He received a Bachelor of Arts degree
from the University of Nevada, Reno in 1966, and obtained his
Juris Doctorate in 1969 from the University of Utah College of
Law, where he was Managing Editor of the Utah Law Review.
Anthony L. DiCesare was employed by KIC from April 1991 to July
1994 and joined Alliance in July 1994. Prior to that time and
since he graduated from business school in 1989, he was employed
as an associate at Wasserstein, Perella & Co., Inc., where he
worked in the Mergers and Acquisitions group. Mr. DiCesare
graduated from Harvard College, with an A.B. degree in economics,
in 1985 and from the Harvard Business School, from which he
obtained an M.B.A. degree, in 1989.
John W. Alderfer joined the Company in September 1990 as Vice
President, Chief Financial Officer and Treasurer. Mr. Alderfer
was subsequently promoted to Senior Vice President in December
1993. Prior to joining the Company, Mr. Alderfer had been the
Chief Financial Officer of The Bicycle Club, which is a Los
Angeles-based card casino, since February 1989. From 1971 to
1988 Mr. Alderfer served in various financial capacities with the
Summa Corporation, the Howard R. Hughes Estate Businesses, which
operated numerous gaming establishments in Las Vegas and Reno.
From 1966 to 1971 he was employed as a certified public
accountant by Deloitte & Touche (then known as Haskins & Sells).
Mr. Alderfer received his Bachelor of Science in Business
Administration with an accounting major from Texas Tech
University in 1966 and is a certified public accountant.
David D. Johnson joined the Company as Senior Vice President and
General Counsel in March 1995. Previously, Mr. Johnson developed
extensive gaming industry experience representing a diverse group
of casino clients as a Senior Partner at Schreck, Jones,
Bernhard, Woloson & Godfrey, one of Nevada's leading law firms.
Prior to joining Schreck, Jones, et al, Mr. Johnson served as
Chief Deputy Attorney General for the gaming division of the
Nevada Attorney General's office. Mr. Johnson serves as Vice
Chairman of the Executive Committee of the Nevada State Bar's
Gaming Law Section and is an officer and founding member of the
Nevada Gaming Attorneys Association. He is also a member of IAGA
and has served as Editor of The Gaming Lawyer, the quarterly
newsletter of IAGA and the Gaming Law Section of the American Bar
Association. Mr Johnson holds a Bachelor of Arts degree in
Political Science from the University of Nevada at Las Vegas and
earned his Doctor of Law degree from Creighton University in
1978.
Robert L. Miodunski joined the Company as Senior Vice President -
Nevada Route Group in March 1994. From January 1991 to March
1994, Mr. Miodunski was President of Mulholland-Harper Company, a
sign manufacturing and service company. From 1984 through 1990,
Mr. Miodunski held various positions with Federal Signal Company,
the most recent being Vice President and General Manager of the
Midwest Region of the Sign Group. He received his B.S. in
Mechanical Engineering from the University of Missouri and an
M.B.A. from the University of Dallas.
Robert L. Saxton joined the Company in 1982 as Corporate
Controller and was elected a Vice President in December 1993.
Since joining the Company, Mr. Saxton has held various management
positions with the Nevada Route Group and is currently
responsible for casino operations. He also serves as President
of the Company's Louisiana subsidiaries. Mr. Saxton received his
B.S. from the University of Nevada, Las Vegas and is a certified
public accountant.
Robert M. Hester joined the Company in October 1993 as Director
of Human Resources and was promoted to Vice President - Human
Resources and Administration in December 1993. From 1989 to
1993, Mr. Hester was Director of Human Resources for Sam's Town
Hotel & Casino in Las Vegas. From 1987 to 1989, he was Director
of Human Resources for the Showboat Hotel & Casino in Las Vegas.
Mr. Hester received his B.S. from the University of Nevada, Las
Vegas.
Robert A. Woodson joined the Company in 1988 as Director of
Gaming Compliance and was promoted to Vice President - Regulatory
Compliance in September 1993. Prior to joining the Company, Mr.
Woodson was with the Investigation Division of the State of
Nevada Gaming Control Board for 10 years. Mr. Woodson received
his B.S. from California State University, Fullerton.
Johnann F. McIlwain joined the Company in June 1994 as Vice
President - Marketing. From 1991 to 1992, Ms. McIlwain was Vice
President of Marketing for Greenwood, Inc., a Philadelphia-based
gaming and entertainment company. From 1989 to 1991, she was
Director of Marketing Services for Hospitality Franchise Systems,
Inc. in Parsippany, New Jersey. Prior to joining Hospitality
Franchise Systems, Ms. McIlwain served as Director of Advertising
for the Resorts International Casino Hotel and the Trump Taj
Mahal Casino Hotel. Ms. McIlwain received her B.A. from the
University of Miami in 1969 and an M.B.A. from the Florida
Atlantic University in 1976.
The information required by this item related to the Company's
directors who are not also employees is incorporated by reference
from the Proxy Statement which will be filed with the Securities
and Exchange Commission within 120 days of the end of the
Company's fiscal year covered by this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by
reference from the Proxy Statement which will be filed with the
Securities and Exchange Commission within 120 days of the end of
the Company's fiscal year covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is incorporated by
reference from the Proxy Statement which will be filed with the
Securities and Exchange Commission within 120 days of the end of
the Company's fiscal year covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by
reference from the Proxy Statement which will be filed with the
Securities and Exchange Commission within 120 days of the end of
the Company's fiscal year covered by this report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Documents filed as part of report: Page
1. Financial Statements:
Independent Auditors' Report F-1
Consolidated Balance Sheets as of June 30, 1994 and 1995 F-2
Consolidated Statements of Operations for the Years ended
June 30, 1993, 1994 and 1995 F-4
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1993, 1994 and 1995 F-5
Consolidated Statements of Stockholders' Equity
for the Years Ended June 30, 1993, 1994 and 1995 F-6
Notes to Consolidated Financial Statements F-7
2. Consolidated Supplemental Schedules:
Not applicable.
3. Exhibits:
Exhibit
Number Description
2.1 Basic Agreement, dated as of October 29, 1993,
among United Gaming, Inc., The Rainbow Casino
Corporation, John A. Barrett, Jr. and Leigh Seippel,
and exhibits thereto. (12)
2.2 Letter Agreement, dated as of November 5, 1993,
among United Gaming, Inc., Capital Gaming
International, Inc., I.G. Davis, Jr. and John E. Dell,
with exhibits thereto. (14)
2.3 Asset purchase agreement between Plantation
Investments, Inc. and Richards-Schnack Development
Corp. dated April 2, 1990. (1)
2.4 First Amendment to Agreement of purchase and sale
between Plantation Investments, Inc. and Richards-
Schnack Development Corp. (1)
3. Exhibits (continued):
Exhibit
Number Description
2.5 Bill of Sale between Plantation Investments, Inc.
and Richards-Schnack Development, Corp. (1)
2.6 Consolidation Agreement, dated March 29, 1995
among the Company, United Gaming Rainbow, Inc., RCC,
RCVP, NGM, HFS, National Gaming Corporation, Rainbow
Development Corporation and Leigh Seippel and John A.
Barrett, Jr. (23)
2.7 Offer to Purchase common shares of Bally Gaming
International, Inc., dated July 28, 1995. (24)
3.1 Restated Articles of Incorporation of the
Registrant, as amended. (16)
3.2 Revised By-Laws of the Registrant. (20)
4.1 Common Stock Purchase Warrant issued to Alfred H.
Wilms upon execution of his loan commitment with Video
Services, Inc. (6)
4.2 Certificate of Designations, Preferences and
Relative, Participating, Optional and other Special
rights of Special Stock and Qualifications, Limitations
and Restrictions thereof of Non-Voting Junior
Convertible Special Stock of United Gaming, Inc. (8)
4.3 Form of Certificate evidencing Non-Voting Junior
Convertible Special Stock. (8)
4.4 Indenture, dated as of September 14, 1993, between
United Gaming, Inc. and NationsBank of Texas, N.A., as
Trustee in respect of the Company's 7-1/2% Convertible
Subordinated Debentures due 2003. (16)
4.5 Form of 7-1/2% Convertible Subordinated Debenture
due 2003 (included in Exhibit 4.4, above).
4.6 Registration Rights Agreement, dated as of
September 21, 1993, by and among United Gaming, Inc.,
Donaldson Lufkin & Jenrette Securities Corporation,
Oppenheimer & Co., Inc. and L.H. Friend, Weinress &
Frankson, Inc. (16)
10 Loan and Warrant Agreement dated March 24, 1992
between United Gaming, Inc., Video Services, Inc. and
Alfred H. Wilms. (6)
10.1 Lease, dated August 3, 1988, as amended April 6,
1989, from Walter Schwartz to the Company for the
Company's Corporate headquarters building at 4380
Boulder Highway, Las Vegas, Nevada. (2)
10.5 * Employment agreement between United Gaming, Inc.
and Ira S. Levine. (13)
10.5.1 * Amendment to Employment agreement between United
Gaming, Inc. and Ira S. Levine. (21)
3. Exhibits (continued):
Exhibit
Number Description
10.6 * Employment agreement between United Gaming, Inc.
and John W. Alderfer. (13)
10.6.1 * Amendment to Employment agreement between United
Gaming, Inc. and John W. Alderfer. (20)
10.7 Letter Agreement dated June 25, 1993 among United
Gaming, Inc., Kirkland-Ft. Worth Investment Partners,
L.P., Kirkland Investment Corporation and, as to
certain provisions, Alfred H. Wilms, including Exhibit
A (form of Securities Purchase Agreement), Exhibit B
(form of Stockholders Agreement), Exhibit C (form of
Certificate of Designations of Non-Voting Junior
Convertible Special Stock), Exhibit D (Form of Warrant
Agreement), and Exhibit E (form of press release)
thereto. (7)
10.8 Advisory Agreement, dated June 25, 1993 among
United Gaming, Inc., Gaming Systems Advisors, L.P. and,
as to certain provisions, Mr. Alfred H. Wilms,
including Exhibit A (form of Warrant Agreement) and
Exhibit B (form of press release) thereto. (7)
10.9 * United Gaming, Inc. 1991 Long-Term Incentive Stock
Option Plan (10)
10.10 * Gaming and Technology, Inc. 1984 Employee Stock
Option Plan (11)
10.12 Agreement, dated as of September 14, 1993, by and
among United Gaming, Inc., Kirkland-Ft. Worth
Investment Partners, L.P., Kirkland Investment
Corporation, Gaming Systems Advisors, L.P. and Alfred
H. Wilms. (8)
10.13 Warrant Agreement, dated as of September 21, 1993,
by and between United Gaming, Inc. and Kirkland-Ft.
Worth Investment Partners, L.P. relating to warrants to
purchase 2.75 million shares of Common Stock. (8)
10.14 Warrant Agreement, dated as of September 21, 1993,
by and between United Gaming, Inc. and Gaming Systems
Advisors, L.P. relating to warrants to purchase 1.25
million shares of Common Stock. (8)
10.15 Stockholders Agreement, dated as of September 21,
1993, by and among United Gaming, Inc., Kirkland-Ft.
Worth Investment Partners, L.P., Kirkland Investment
Corporation, Gaming Systems Advisors, L.P. and Alfred
H. Wilms. (8)
10.15.1 Amendment to Stockholders Agreement dated as of
October 20, 1994 (16)
10.15.2 Selling Stockholder Letter Agreement dated as of
March 20, 1995 (22)
10.16 Securities Purchase Agreement, dated as of
September 21, 1993, by and among United Gaming, Inc.,
Kirkland-Ft. Worth Investment Partners, L.P. and
Kirkland Investment Corporation (8)
3. Exhibits (continued):
Exhibit
Number Description
10.20 * Confidential Separation and Consulting Agreement
with Carole A. Carter (including mutual release) dated
July 15, 1993. (9)
10.21 * Executive Severance Agreement with Shannon L.
Bybee dated July 15, 1993. (9)
10.21.1 * Amendment to Executive Severance Agreement with Shannon
L. Bybee dated July 15, 1993. (20)
10.23 Secured Promissory Note, dated as of October 29,
1993, from John A. Barrett, Jr. and Leigh Seippel to
United Gaming, Inc. (12)
10.24 Escrow Agreement, dated as of October 29, 1993,
among United Gaming, Inc., The Rainbow Casino
Corporation, John A. Barrett, Jr., Leigh Seippel and
Butler, Snow, O'Mara, Stevens & Cannada. (12)
10.25 Pledge Agreement, dated as of October 29, 1993,
among United Gaming, Inc. (as secured party) and The
Rainbow Casino Corporation, John A. Barrett, Jr. and
Leigh Seippel (as pledgors) (12)
10.26 Management Agreement, dated as of October 29,
1993, among Rainbow Casino-Vicksburg Partnership, L.P.,
The Rainbow Casino Corporation and Mississippi
Ventures, Inc., as manager. (12)
10.28 Letter Agreement, dated as of December 10, 1993,
among United Gaming, Inc., Capital Gaming
International, Inc.and I.G. Davis, Jr. (15)
10.29 Loan and Security Agreement, dated as of August 2,
1993, between United Gaming, Inc., Alfred H. Wilms and
Video Services, Inc. (16)
10.30 Warrant Agreement, dated as of August 2, 1993,
between United Gaming, Inc. and Alfred H. Wilms. (16)
10.31 Common Stock Purchase Warrant, dated as of
September 21, 1993, between United Gaming, Inc. and
Donaldson, Lufkin & Jenrette Securities Corporation.
(16)
10.32 Common Stock Purchase Warrant, dated as of
September 21, 1993, between United Gaming, Inc. and
Oppenheimer & Co. Inc. (16)
10.33 Common Stock Purchase Warrant, dated as of
September 21, 1993, between United Gaming, Inc. and
L.H. Friend, Weinress & Frankson, Inc. (16)
10.34 Common Stock Purchase Warrant, dated as of
September 21, 1993, between United Gaming, Inc. and
Donaldson, Lufkin & Jenrette Securities Corporation.
(16)
3. Exhibits (continued):
Exhibit
Number Description
10.36 Consulting Agreement, dated as of November 8,
1993, between David A. Scheinman and United Gaming,
Inc. (16)
10.37 Letter Agreement, dated as of March 3, 1994, by
and among United Native American Gaming, Inc., USA
Gaming of Native America, Inc., USA Gaming, Inc. and
others. (17)
10.38 Letter Agreement, dated as of February 25, 1994,
among United Gaming, Inc., The Rainbow Casino
Corporation, John A. Barrett, Jr. and Leigh Seippel.
(18)
10.39 Letter Agreement, dated as of June 29, 1994, among
United Gaming, Inc., The Rainbow Casino Corporation,
John A. Barrett, Jr. and Leigh Seippel, consented to by
HFS Gaming Corporation. (19)
10.40 Letter Agreement, dated as of July 16, 1994, among
United Gaming, Inc., The Rainbow Casino Corporation,
John A. Barrett, Jr. and Leigh Seippel, consented to by
HFS Gaming Corporation. (19)
10.41 Second Amendment to Casino Financing Agreement,
dated as of August 11, 1994, among United Gaming, Inc.,
United Gaming Rainbow, Inc., Rainbow Casino-Vicksburg
Partnership, L.P., The Rainbow Casino Corporation, John
A. Barrett, Jr., Leigh Seippel and HFS Gaming
Corporation. (19)
10.42 Partnership Agreement of Rainbow Casino-Vicksburg
Partnership, L.P., dated as of July 8, 1994. (19)
10.42.1 Second Amended and Restated Agreement of Limited
Partnership, dated march 29, 1995, between United
Gaming Rainbow and RCC. (23)
10.43 Promissory Note, dated as of July 16, 1994, from
United Gaming Rainbow, Inc. to The Rainbow Casino
Corporation. (19)
10.44 Pledge Agreement, dated as of July 16, 1994, from
United Gaming Rainbow, Inc. to The Rainbow Casino
Corporation. (19)
10.45 Promissory Note, dated as of July 16, 1994, from
John A. Barrett, Jr. and Leigh Seippel to United
Gaming, Inc. (19)
3. Exhibits (continued):
Exhibit
Number Description
10.46 Escrow Agreement, dated as of August 11, 1994,
among United Gaming Rainbow, Inc., The Rainbow Casino
Corporation, John A. Barrett, Jr., Leigh Seippel and
Butler, Snow, O'Mara, Stevens & Cannada, together with
Agreement dated February 7, 1994, as amended July 11,
1994 between Rainbow Casino-Vicksburg Partnership, L.P.
and the City of Vicksburg, Mississippi (19)
10.47 * Employment Agreement between United Gaming, Inc.
and Johnann McIlwain. (20)
10.48 Settlement Agreement, dated December 4, 1994, by
and among the Company, United Gaming of Iowa, Inc.,
GDREC and Joseph and Paula Zwack (16)
10.49 * Employment Agreement, dated August 15, 1994,
between the Company and Steven Greathouse (22)
10.50 Warrant Agreement, dated August 15, 1994, between
the Company and Steven Greathouse (22)
10.51 Agreement, dated September 1, 1994, between the
Company and Craig Fields (22)
10.52 Warrant Agreement, dated September 1, 1994,
between the Company and Craig Fields (22)
10.53 Agreement, dated March 20, 1995, between the
Company and Joel Kirschbaum (22)
10.54 Letter Agreement, dated March 29, 1995, among
United Gaming Rainbow, RCC, Leigh Seippel, John A.
Barrett, Jr and Butler, Snow, O'Mara, Stevens &
Cannada. (23)
10.55 Class A Note Payable, dated March 29, 1995, issued
by RCVP to United Gaming Rainbow. (23)
10.56 Class B Note Payable, dated March 29, 1995, issued
by RCVP to United Gaming Rainbow. (23)
10.57 Class B Note Payable, dated March 29, 1995, issued
by RCVP to National Gaming Mississippi, Inc. (23)
10.58 Release, dated March 29, 1995, by United Gaming
Rainbow and the Company and their affiliates of RCC,
Rainbow Development Corporation, John A. Barrett, Jr.
and Leigh Seippel and their affiliates (other than
RCVP). (23)
10.59 Release, dated March 29, 1995, by RCC, Rainbow
Development Corporation, John A. Barrett, Jr. and Leigh
Seippel and their affiliates (other than RCVP) of
United Gaming Rainbow and the Company and their
affiliates. (23)
10.60 Letter Agreement, dated August 14, 1995, among the
Company, Bally Gaming International, Inc. and WMS
Industries, Inc. (24)
3. Exhibits (continued):
Exhibit
Number Description
10.61 Commitment Letter, dated August 30, 1995, between
Foothill Capital Corporation and the Company. (25)
10.62 Commitment Letter, dated August 30, 1995, between
Canpartners Investments IV, LLC and Cerberus Partners,
L.P. and the Company. (25)
10.63 Fee Letter, dated August 30, 1995, between Canyon
Capital Management, L.P. and the Company. (25)
10.64 Fee Letter, dated August 30, 1995, between
Cerberus Partners, L.P. and the Company. (25)
10.65 Guarantee, dated August 30, 1995, from CPI
Securities, L.P. and The Value Realization Fund, L.P.
to the Company. (25)
10.66 Form of Stock Purchase Agreement, dated September
15, 1995, related to private placement of Non-Voting
Junior Convertible Special Stock, Series B.
21 Subsidiaries of the Registrant
23 Consent of KPMG Peat Marwick LLP
24 Power of Attorney
27 Financial Data Schedule
99 Complaint in Alliance Gaming Corporation v. Bally
Gaming International, Inc., WMS Industries, Inc.,
Richard Gillman, Hans Kloss, Neil E. Jenkins, Charles
C. Carella, James J. Florio, Lewis Katz, and Kenneth D.
McPherson filed in the Chancery Court of Delaware for
New Castle County on July 25, 1995. (24)
(1) Incorporated by reference to the Registrant's Form
8-K dated April 9, 1990 as amended.
(2) Incorporated by reference to the Registrant's Form
10-K for the year ended June 30, 1989.
(3) Incorporated by reference to the Registrant's Form
10-K for the year ended June 30, 1990.
(4) Incorporated by reference to the Registrant's Form
10-Q for the quarter ended September 30, 1990.
(5) Incorporated by reference to the Registrant's Form
10-K for the year ended June 30, 1991.
(6) Incorporated by reference to the Registrant's Form
8-K dated March 31, 1992.
(7) Incorporated by reference to the Registrant's Form
8-K dated June 25, 1993.
(8) Incorporated by reference to the Registrant's Form
8-K dated September 21, 1993.
(9) Incorporated by reference to the Registrant's Form
10-Q dated September 30, 1993.
(10) Incorporated by reference to the Registrant's
Forms S-8 Reg. Nos. 33-45811 and 33-75308.
(11) Incorporated by reference to the Registrant's Form
S-8 Reg. No. 2-98777.
(12) Incorporated by reference to the Registrant's Form
8-K dated October 29, 1993.
3. Exhibits (continued):
(13) Incorporated by reference to the Registrants's Form 10-
Q for the quarter ended March 31, 1993.
(14) Incorporated by reference to the Registrant's Form 8-K
dated November 5, 1993
(15) Incorporated by reference to the Registrant's Form
8-K dated December 10, 1993.
(16) Incorporated by reference to the Registrant's Form
S-2 Reg. No. 33-72990 and subsequent amendments
thereto.
(17) Incorporated by reference to the Registrant's Form
8-K dated March 7, 1994.
(18) Incorporated by reference to the Registrant's Form
8-K dated March 15, 1994.
(19) Incorporated by reference to the Registrant's Form
8-K dated August 11, 1994.
(20) Incorporated by reference to the Registrant's Form
10-K for the year ended June 30, 1994.
(21) Incorporated by reference to the Registrant's Form
10-Q for the quarter ended September 30, 1994.
(22) Incorporated by reference to the Registrant's Form
S-3 Reg. No. 33-58233.
(23) Incorporated by reference to the Registrant's Form
8-K dated March 29, 1995.
(24) Incorporated by reference to the Registrant's
Schedule 14D-1 and Schedule 13D dated July 28, 1995.
(25) Incorporated by reference to the Registrant's
amended Schedule 14D-1 and amended Schedule 13D dated
September 1, 1995.
* Identifies each management contract or
compensatory plan or arrangement required to be filed
pursuant to Item 14(c) of this Report.
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K for the three months
ended June 30, 1995.
(c) See Item 14(a)(3) above.
(d) See Item 14(a)(2) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ALLIANCE GAMING CORPORATION DATED: March 4, 1996
By /s/ Steve Greathouse
Steve Greathouse, Chairman of
the Board of Directors, President
and Chief Executive Officer
By /s/ John W. Alderfer
John W. Alderfer, Sr. Vice
President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
Name Title Date
/s/ Joel Kirschbaum Director March 4, 1996
Joel Kirschbaum
/s/ Alfred H. Wilms Director March 4, 1996
Alfred H. Wilms
/s/ Anthony DiCesare Director March 4, 1996
Anthony DiCesare
/s/ Craig Fields Vice Chairman of the Board March 4, 1996
Dr. Craig Fields
/s/ David Robbins Director March 4, 1996
David Robbins
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Alliance Gaming Corporation
We have audited the consolidated balance sheets of Alliance
Gaming Corporation and subsidiaries as of June 30, 1995 and 1994
and the related consolidated statements of operations,
stockholders equity and cash flows for each of the years in the
three-year period ended June 30, 1995. These consolidated
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Alliance Gaming Corporation and subsidiaries as of
June 30, 1995 and 1994, and the results of their operations and
their cash flows for each of the years in the three-year period
ended June 30, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 6 to the consolidated financial statements,
effective July 1, 1993 Alliance Gaming Corporation adopted the
provisions of Financial Accounting Standards Board's Statement of
Financial Accounting Standard No. 109, Accounting for Income
Taxes.
KPMG Peat Marwick LLP
Las Vegas, Nevada
September 1, 1995
F-1
<TABLE>
<CAPTION>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1994 and 1995
ASSETS
1994 1995
(In thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 37,085 $ 13,734
Securities available for sale 12,489 23,680
Receivables, net 5,924 3,316
Inventories 661 714
Prepaid expenses 4,420 4,148
Refundable income taxes 361 361
Other 30 156
Total current assets 60,970 46,109
Property and equipment:
Land and improvements 3,229 17,296
Building and improvements 4,286 8,822
Gaming equipment 30,395 36,396
Furniture, fixtures and equipment 9,632 11,582
Leasehold improvements 5,222 5,372
Construction in progress 212 30
52,976 79,498
Less accumulated depreciation and amortization 24,293 29,146
Property and equipment, net 28,683 50,352
Other assets:
Receivables, net 4,609 5,309
Excess of costs over net assets of an acquired business,
net of accumulated amortization of $295 (1994) and
$585 (1995) 3,789 3,842
Intangible assets, net of accumulated amortization of
$4,145 (1994) and $5,516 (1995) 13,527 12,405
Deferred tax assets 1,081 1,399
Investment in minority owned subsidiary 2,000 1,585
Other 4,757 5,347
Total other assets 29,763 29,887
$119,416 $126,348
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<TABLE>
<CAPTION>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1994 and 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
1994 1995
(In thousands, except per share amounts)
<S> <C> <C> <C>
Current liabilities:
Current maturities of long term debt $ 1,504 $ 3,995
Accounts payable 1,661 1,758
Accrued expenses, including related parties
of $312 (1994) and $931 (1995) 6,879 8,804
Total current liabilities 10,044 14,557
Long term debt, less current maturities 89,222 97,402
Deferred tax liabilities 1,218 1,205
Other liabilities 3,587 2,556
Total liabilities 104,071 115,720
Commitments and contingencies
Minority interest 246 643
Stockholders' equity:
Common stock, $.10 par value; authorized
175,000,000 shares; issued 10,505,928 shares
(1994) and 11,654,150 shares (1995) 1,051 1,165
Special stock, $0.10 par value; authorized
10,000,000 shares; issued 1,333,333
(1994 and 1995) 133 133
Paid-in capital 26,716 32,134
Unrealized loss on securities available for sale (421) (316)
Accumulated deficit (12,380) (23,131)
Total stockholders' equity 15,099 9,985
$119,416 $126,348
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<TABLE>
<CAPTION>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 30 1993, 1994 and 1995
1993 1994 1995 <S> <C>
(In thousands, except per share amounts)
<S> <C> <C> <C>
Revenues:
Gaming
Routes $ 96,282 $102,830 $106,827
Casino and gaming arcades 12,526 15,679 21,287
Food and beverage sales 4,184 4,480 3,847
Net equipment sales 99 65 27
113,091 123,054 131,988
Costs and expenses:
Cost of gaming:
Routes 72,614 76,332 79,875
Casino and taverns 8,667 11,871 11,436
Cost of food and beverage 2,876 3,084 2,795
Cost of equipment sales 49 20 12
Selling, general & administrative 12,667 13,555 14,633
Business development expenses 900 1,192 7,843
Corporate expenses 6,191 7,882 9,735
Bad debt expense 461 705 400
Loss on abandoned small casinos --- 3,713 ---
Loss on abandoned taverns --- 2,638 ---
Depreciation and amortization 8,718 9,530 9,520
113,143 130,522 136,249
Operating loss (52) (7,468) (4,261)
Other income (expense):
Interest income 998 2,084 2,798
Interest expense (5,046) (6,830) (8,133)
Minority share of income --- (506) (397)
Equity in income of affiliate --- --- 31
Other, net 450 (167) (524)
Loss before income taxes (3,650) (12,887) (10,486)
Income tax expense --- (241) (265)
Net loss $ (3,650) $(13,128) $(10,751)
Net loss per common share $ ( 0.38) $ (1.28) $ (0.95)
Weighted average common shares outstanding 9,696 10,251 11,300
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<TABLE>
<CAPTION>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30 1993, 1994 and 1995
1993 1994 1995
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (3,650) $(13,128) $(10,751)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization 8,718 9,530 9,520
Loss on abandoned casinos --- 3,713 ---
Loss on abandoned taverns --- 2,638 ---
Write-off of other assets 149 1,817 2,796
Provision for losses on receivables 461 705 400
Amortization of debt discounts 265 292 297
Undistributed earnings of affiliate --- --- (31)
Non-cash stock compensation expense --- --- 1,313
Net change in operating assets and liabilities:
(Increase) decrease in:
Inventories (233) 78 (40)
Prepaid expenses 1,475 (519) 381
Refundable income taxes 766 (361) ---
Other 305 254 (126)
Increase (decrease) in:
Accounts and slot contracts payable (2,378) 269 (447)
Accrued and deferred income taxes --- 137 (137)
Other liabilities, including minority interest (153) 511 397
Accrued expenses 184 3,126 (2,615)
Net cash provided by operating activities 5,909 9,062 957
Cash flows from investing activities:
Additions to property and equipment (5,092) (5,385) (8,887)
Proceeds from sale of property and equipment 257 1,466 351
Additions to receivables (8,715) (18,801) (8,970)
Cash collections on receivables 7,925 17,541 10,315
Net cash provided by acquisition of business --- --- 2,481
Acquisition of securities available for sale --- (12,910) (11,086)
Acquisition of partnership interests --- (2,000) (1,585)
Additions to intangible assets (77) (5,179) (390)
Additions to other long-term assets (3,296) (2,031) (3,877)
Net cash used in investing activities (8,998) (27,299) (21,648)
Cash flows from financing activities:
Proceeds from long-term debt, net of expenses 1,941 81,984 ---
Issuance of common stock warrants 559 116 ---
Reduction of long-term debt (2,167) (41,776) (3,125)
Issuance of special stock, net of costs --- 4,799 ---
Issuance of common stock 2,097 619 465
Net cash provided by
(used in) financing activities 2,430 45,742 (2,660)
Cash and cash equivalents:
(Decrease) increase for year (659) 27,505 (23,351)
Balance, beginning of year 10,239 9,580 37,085
Balance, end of year $ 9,580 $ 37,085 $ 13,734
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<TABLE>
<CAPTION>
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended June 30, 1993, 1994 and 1995
(In thousands)
Total Retained
Stock- Earnings Unreal.
holders' Common Stock Special Stock Paid-in (Accum. Loss on
Equity Shares Dollars Shares Dollars Capital Deficit) Securities
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1992 $23,661 9,409 $ 942 --- --- $18,320 $ 4,398 ---
Net loss (3,650) --- --- --- --- --- (3,650) ---
Common stock
warrants issued 559 --- --- --- --- 559 --- ---
Shares issued upon
exercise of options 2,096 591 59 --- --- 2,038 --- ---
Balances, June 30, 1993 22,666 10,000 1,001 --- --- 20,917 748 ---
Net loss (13,128) --- --- --- --- --- (13,128) ---
Shares issued for
acquisitions 249 112 11 --- --- 238 --- ---
Common stock
warrants issued 116 --- --- --- --- 116 --- ---
Cost of private
placement (201) --- --- --- --- (201) --- ---
Net change in
unrealized loss on (421) --- --- --- --- --- --- (421)
securities available
for sale
Shares issued for
capital infusion 4,999 --- --- 1,333 133 4,866 --- ---
Shares issued upon
exercise of options 819 394 39 --- --- 780 --- ---
Balances, June 30, 1994 15,099 10,506 1,051 1,333 133 26,716 (12,380) (421)
Net loss (10,751) --- --- --- --- --- (10,751) ---
Shares issued for
acquisitions 3,754 712 71 --- --- 3,683 --- ---
Compensatory stock
issued 1,313 250 25 --- --- 1,288 --- ---
Net change in
unrealized loss on
securities available 105 --- --- --- --- --- --- 105
for sale
Shares issued upon
exercise of options 465 186 18 --- --- 447 --- ---
Balances, June 30, 1995 $ 9,985 $11,654 $ 1,165 1,333 $ 133 $32,134 $(23,131) $ (316)
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 1993, 1994 and 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS
Description of business
Alliance Gaming Corporation and its subsidiaries (collectively, the
"Company") are presently engaged in gaming device route operations in
Nevada and in the greater New Orleans, Louisiana area; casino
operations in Nevada and Mississippi; and the design, manufacture and
refurbishment of gaming devices.
Principles of consolidation
The accompanying consolidated financial statements include the
accounts of Alliance Gaming Corporation, its wholly-owned subsidiaries
and indirect subsidiaries and its partially owned, controlled
subsidiaries. In the case of Video Services, Inc. ("VSI"), the
Company owns 490 shares of class B voting stock, which constitutes
100% of the voting stock, of VSI. The Company is entitled to receive
71% of dividends declared by VSI, if any, at such time that such
dividends are declared. In July 1994, the Company acquired a 45%
limited partnership interest in the Rainbow Casino-Vicksburg
Partnership. Accordingly, the Company accounted for its investment in
this partnership under the equity method until March 29, 1995 at which
time the Company increased its partnership interest and assumed the
general partnership position (see Note 11). Effective March 29, 1995,
the results of operations of the Rainbow Casino have been included in
the accompanying consolidated financial statements. All significant
intercompany accounts and transactions have been eliminated.
Revenue recognition
In accordance with industry practice, the Company recognizes gaming
revenues as the net win from route, casino and tavern operations,
which is, for gaming devices, the difference between coins and
currency deposited into the devices and payments to customers and, for
other games, the difference between gaming wins and losses. The
Company recognizes total net win from gaming devices as revenues for
gaming routes which operate under revenue-sharing arrangements and
revenue-sharing payments as a cost of gaming routes. The Company
recognizes revenue from parts and equipment sales to outside
purchasers when the products are shipped.
Location rent expense
For financial statement purposes, the Company recognizes expenses for
fixed periodic rental payments (including scheduled increases) made in
connection with route operation space lease arrangements or sublease
agreements on a straight line basis over the term of the agreement
including any extension periods which are expected to be exercised.
Contingent periodic rental payments are expensed in the period
incurred.
Cash and cash equivalents
The Company considers all highly liquid debt instruments purchased
with an original maturity of three months or less to be cash
equivalents. Such investments of $29,799,000 (1994) and $5,238,000
(1995) are included in cash and cash equivalents and are carried at
cost, which approximates market value.
Securities available for sale
Effective January 1, 1994, the Company adopted Financial Accounting
Standard No. 115. For fiscal years beginning after December 15, 1993,
Statement 115 requires that, except for debt securities classified as
"held-to-maturity" securities, investments in debt and equity
securities should be reported at fair market value. The Company has
designated certain securities as being available for sale. Securities
are designated as available for sale at the time of their purchase.
The Company determines which securities are available for sale by
evaluating whether such securities would be sold in response to
liquidity needs, asset/liability management and other factors.
Securities available for sale are recorded at market value with the
resulting unrealized gains and losses being recorded, net of tax, as a
component of stockholders' equity. Gains or losses on these
securities are determined using the specific identification method.
F-7
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended June 30, 1993, 1994 and 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS
(Continued)
Inventories
Inventories are stated at the lower of cost or market and are
determined by the first-in, first out method.
Property and equipment
Property and equipment are stated at cost and are depreciated and
amortized over their estimated useful lives or lease terms, if less,
using the straight line method as follows:
Building and improvements 31-39 years
Gaming equipment 5-7 years
Furniture, fixtures and equipment 3-10 years
Leasehold improvements 5-20 years
Excess of costs over net assets of an acquired business
Excess of costs over net assets of an acquired business is the excess
of the cost over the value of net tangible assets of an acquired
business and is generally amortized on the straight-line method over a
period of 40 years. In the case of the Company's majority-owned
subsidiary, Native American Investments, Inc., where the assets
acquired are largely intangible, the Company has elected a 10-year
amortization period representing the estimated life of the rights
acquired, consisting principally of contracts to conduct gaming
operations on Indian lands.
At each balance sheet date, management evaluates the realizability of
goodwill based on expectations of non-discounted cash flows and
operating income for each subsidiary having a material goodwill
balance. Based upon its most recent analysis, management believes that
no material impairment of goodwill exists at June 30, 1995.
Intangible assets
Intangible assets consist primarily of costs associated with the
acquisition of location leases which are capitalized and amortized
using the straight-line method over the terms of the leases, ranging
from one to 40 years, with an average life of approximately 11 years.
Intangible assets for fiscal 1995 includes approximately $4,547,000 of
commissions, discounts and other capitalized costs related to the
issuance of the Company's 7.5% Convertible Subordinated Debentures due
2003, net of approximately $957,000 of accumulated amortization. At
June 30, 1994, intangible assets includes $4,993,000 of such costs,
net of $405,000 of accumulated amortization. Such amounts are being
amortized over the term of the debentures.
The carrying value of intangible assets is periodically reviewed by
management and impairment losses are recognized when the expected non-
discounted future operating cash flows derived from such intangible
assets are less than their carrying value.
Other Assets
Other assets includes assets held for sale, long-term deposits and
other non-current assets. In fiscal 1993, the Company paid to certain
property owners a $2,500,000 refundable deposit to operate gaming
devices at their location. Additionally, other assets are presented
net of valuation allowances of $1,763,000 and $631,000 at June 30,
1994 and 1995, respectively.
Loss per share of common stock
Loss per share of common stock has been computed based on the weighted
average number of shares of common stock outstanding. Fully diluted
earnings per share is not presented because the effect would be anti-
dilutive.
F-8
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended June 30, 1993, 1994 and 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS
(Continued)
Income taxes
In February 1992, the Financial Accounting Standards Board issued
Financial Accounting Standard No. 109 Accounting for Income Taxes.
Under the asset and liability method of Statement 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years which those
temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date. Effective July 1, 1993, the Company
adopted Statement 109. The Company previously used the asset and
liability method under Statement 96.
Reclassifications
Certain reclassifications have been made to prior year financial
statements to conform with the current year presentation.
2. RECEIVABLES
The Company's gaming route operations from time to time involve making
loans to location operators in order to participate in revenues over
extended periods of time. The loans, made for build-outs, tenant
improvements and initial operating expenses are generally secured by
the personal guarantees of the operators and the locations' assets.
The majority of the loans are interest bearing and are expected to be
repaid over a period of time not to exceed the life of the revenue
sharing arrangement. The loans have varying payment terms, with
weekly payment amounts ranging from $200 to $1,440 and monthly payment
amounts ranging from $200 to $18,780. Interest rates on the loans
range from prime plus 1.50% to stated rates of 12% with various due
dates ranging from July 1995 to April 2007. The loans are expected to
be repaid from the locations' cash flows or proceeds from the sale of
the leaseholds.
Receivables at June 30 consist of the following:
1994 1995
(In thousands)
Notes receivable-location operators $ 8,319 $ 7,760
Other receivables 2,214 865
10,533 8,625
Less current amounts (5,924) (3,316)
Long-term receivables, excluding
current amounts $ 4,609 $ 5,309
Receivables are presented net of an allowance for doubtful accounts of
$1,389,000 and $1,659,000 as of June 30, 1994 and 1995, respectively.
The allowance is allocated between current and long-term receivables
on a pro rata basis related to notes receivable from location
operators.
During fiscal 1994, the Company cancelled certain sublease agreements
as a result of defaults by payors in making payments and acquired
title to the assets and operating rights to the tavern locations in
exchange for releases of the customers' debt owed to the Company.
During fiscal 1994, interest income of approximately $48,000 was
recognized on these receivables. Total interest income of $130,000
would have been recognized if the receivables had been current in
accordance with their original terms. The total initial investment in
these tavern locations of approximately $2,011,000 includes the net
receivables of approximately $1,362,000 and other assets of $649,000.
No such transactions were completed in fiscal 1995. Management of the
Company has determined the fair value of the locations' assets from
knowledge of sales of comparable establishments and expertise acquired
from operating its gaming devices at similar locations. Due to the
Company's decision to dispose of the currently operated small
independent tavern operations, certain reserves and write downs were
recognized in fiscal 1994 results of operations.
F-9
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended June 30, 1993, 1994 and 1995
2. RECEIVABLES (continued)
Management believes properly managing the disposal of these operations
will protect the Company's existing contractual arrangements from the
tavern locations as well as assure their continued operation while
preserving the Company's investment. Management cannot estimate when
or how many of these locations will be obtained and subsequently
disposed.
3. LOSS ON ABANDONMENT OF SMALL CASINOS AND TAVERNS
In fiscal 1994, due to continuing losses from operations, negative
cash flows and incompatibility with the Company's long-term growth
strategy, the Company's Board of Directors resolved to 1) exit the
downtown Las Vegas gaming market and 2) dispose of the currently
operated small independent taverns on commercially reasonable terms as
market conditions warrant.
As a result of the decision to exit the downtown Las Vegas gaming
market, the Company substantially reduced operations at both the
Trolley Stop Casino and Miss Lucy's Gambling Hall & Saloon. Included
in the 1994 statements of operations are total expenses of
approximately $3,246,000 related to these actions. The total charge
included approximately $488,000 related to the write-down of assets
and approximately $2,758,000 representing primarily the present value
of the future lease payments net of estimated future sublease income.
The decision to withdraw from the tavern business resulted in expenses
of approximately $2,638,000 being recognized in fiscal 1994.
Approximately $1,813,000 of the total amount was related to the write
down of assets while approximately $825,000 represented primarily the
present value of the future lease payments net of estimated future
sublease income. The Company has entered into an agreement to sell
all of its tavern locations to an unaffiliated third party. The sale
is contingent upon, among other conditions, approval by Nevada gaming
authorities.
In addition to the items noted above, the Company's lease on the
Mizpah Hotel and Casino has a remaining term of approximately 7.5
years with an option on the Company's behalf to terminate the lease
arrangement with 120 days written notice at any time after December
31, 1995. The Company has notified the landlord of the Mizpah of its
intention to exercise the termination clause of the lease at that
time. As a result of this decision, the Company recognized an expense
of $467,500 in fiscal 1994.
4. DEBT
Long-term debt at June 30 consists of the following:
1994 1995
(In thousands)
7.5% Convertible subordinated debentures
due 2003, unsecured $85,000 $85,000
Due to stockholder, net of discount of $983,709
(1994) and $747,619 (1995), secured by
the assets of VSI 4,390 3,309
Hospitality Franchise Systems, secured by the
assets of Rainbow --- 9,065
Other, secured by related equipment 1,336 4,023
90,726 101,397
Less current maturities 1,504 3,995
Long-term debt, less current maturities $89,222 $97,402
F-10
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended June 30, 1993, 1994 and 1995
4. DEBT (continued)
Accrued interest of approximately $1,893,000 (1994) and $1,991,000
(1995) is included in accrued expenses in the Consolidated Balance
Sheets. Included in these amounts are $30,343 (1994) and $27,813
(1995) due to affiliates of Alfred H. Wilms, principal stockholder and
member of the Board of Directors of the Company, related to funding of
VSI's gaming device route operations.
In September 1993, the Company completed the private placement of
$85,000,000 aggregate principal amount of its 7.5% Convertible
Subordinated Debentures due 2003. The debentures pay interest semi-
annually on March 15 and September 15. These debentures are
convertible at any time into shares of the Company's common stock at a
conversion price of $10 per share (equivalent to a conversion rate of
100 shares per $1,000 principal amount of debentures), subject to
adjustment. Upon
certain defined events, including a change of control, holders of the
debentures have the right to require the Company to redeem the
debentures for cash at the rate of 101% of principal amount plus
accrued interest. The debentures are redeemable at predetermined
redemption prices, in whole or in part, at the option of the Company
for cash at any time on and after September 15, 1995 if the market
price of the common stock exceeds 250% of the conversion price for 20
out of any 30 consecutive trading days or at any time on and after
September 15, 1996.
In March 1992, Alfred H. Wilms, director and principal stockholder
(and then Chairman of the Board of Directors and Chief Executive
Officer) of the Company, committed to provide or cause others to
provide a $6,500,000 five year subordinated loan to VSI, the Company's
controlled subsidiary which loan has been funded in full and is
secured by a subordinated interest in all of VSI's present and future
personal property. Until August 1993, the loan required quarterly
payments of interest. In August 1993, the loan agreement was amended
to extend the maturity of the loan to September 1, 1998 and to require
quarterly payments of principal and interest. Interest on the loan
accrues at the rate of 200 basis points above the 90-day London Inter
Bank Offered Rate, adjusted quarterly. At June 30, 1995 the interest
rate for the note was 8.2275%.
During 1995, Hospitality Franchise Systems, Inc. ("HFS") agreed to
loan $7,750,000 to the Company's majority controlled subsidiary RCVP
in connection with the construction of the Rainbow Casino. The loan
amount was subsequently increased to $10,000,000. The note bears
interest at 7.5% per annum and requires monthly payments of principal
and interest over an 24 month period. In exchange for funding this
loan, HFS is also entitled to receive a monthly royalty fee equal to
12% of the casino's gaming revenues. Included in the consolidated
results of operations for fiscal 1995 are approximately $810,000 of
such royalties.
Maturities of long-term debt for each of the five years ending
subsequent to June 30, 1995 are as follows:
1996 $ 3,995,000
1997 3,927,000
1998 2,825,000
1999 1,670,000
2000 1,723,000
Thereafter 87,257,000
F-11
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended June 30, 1993, 1994 and 1995
5. STOCKHOLDERS' EQUITY
The Company's Articles of Incorporation authorize the issuance of up
to 10,000,000 shares of special stock, par value $.10 per share
("Special Stock"). Special Stock consists of non-voting stock where
no holder of the Special Stock shall be entitled to vote at any
meeting of stockholders or otherwise, except as otherwise may be
specifically provided by law or as approved by the Board of Directors
in certain limited circumstances at the time of the stock issuance.
The Special Stock may be issued from time to time in one or more
series, each series having such designations, preferences and
relative, participating, optional or other special rights,
qualifications, limitations or restrictions as shall be stated and
expressed in the resolution providing for the issuance of Special
Stock or any series thereof adopted by the Board of Directors. The
Board has designated an initial series of Special Stock as "Non-voting
Junior Convertible Special Stock" which consists of 1,333,333 shares
(the "Initial Series"). The Company's Articles of Incorporation
provide that the Initial Series is intended to have the same rights as
the Common Stock except that the Initial Series has no voting rights
and a $.01 per share liquidation preference. At June 30, 1995, only
the Initial Series of Special Stock was outstanding. The Initial
Series is convertible on a share for share basis into shares of Common
Stock of the Company.
In 1984, the Company created an Employee Stock Option Plan (the "1984
Plan") that provides for the issuance of up to 2,000,000 shares of
common stock to Company employees and directors. At June 30, 1995,
there were incentive stock options covering 207,000 shares and non-
qualified stock options covering 10,000 shares outstanding under the
1984 Plan.
At June 30, 1994 there were incentive stock options covering 376,000
shares and non-qualified stock options covering 15,000 shares
outstanding under the 1984 Plan. Generally, options are granted at
the fair market value of the Company's Common Stock at the date of the
grant and become exercisable over five years.
In 1992, the Company created the 1991 Long Term Incentive Plan (the
"Incentive Plan") that, as amended, provides for the issuance of up to
3,000,000 shares of common stock to Company employees and directors.
At June 30, 1995 there were incentive stock options covering 2,400,834
shares outstanding under the Incentive Plan. At June 30, 1994 there
were incentive stock options covering 1,099,500 shares outstanding
under the Incentive Plan. Generally, options are granted at the fair
market value of the Company's Common Stock at the date of the grant
and become exercisable over five years.
Transactions involving stock options are summarized as follows:
Options Outstanding
Shares Exercise Price
Balance, June 30, 1992 1,546,150 1.375-8.750
Granted 300,000 5.875-8.750
Exercised (590,700) 1.375-4.875
Cancelled (3,600) 3.875
Balance, June 30, 1993 1,251,850 1.375-8.750
Granted 690,500 6.500-10.125
Exercised (393,850) 1.625-4.000
Cancelled (58,000) 2.125-4.000
Balance, June 30, 1994 1,490,500 1.375-10.125
Granted 1,598,334 5.750-8.000
Exercised (186,000) 1.375-4.000
Cancelled (285,000) 3.500-10.000
Balance, June 30, 1995 2,617,834 1.625-9.250
Exercisable at June 30, 1995 825,600 1.625-9.250
F-12
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended June 30, 1993, 1994 and 1995
5. STOCKHOLDERS' EQUITY (Continued)
Also at June 30, 1995, Mr. Wilms held warrants to purchase 2,000,000
shares of Common Stock at $2.50 per share, subject to adjustment.
These warrants were issued in connection with the funding of the
$6,500,000 five year subordinated loan for VSI.
Upon closing of the private placement of the Company's 7.5%
Convertible Subordinated Debentures and the $5 million equity
investment by Kirkland-Ft. Worth Investment Partners, L.P.
("Kirkland") on September 21, 1993, the Company issued warrants to
purchase up to 2,750,000 shares of Common Stock at $1.50 per share to
Kirkland. These warrants are exercisable one year after the grant
date and only after the market price of the Common Stock reaches
certain predetermined levels. Under the same terms, the Company
issued warrants to purchase 1,250,000 and 30,000 shares of Common
Stock to Gaming Systems Advisors, L.P. ("GSA") and L.H. Friend,
Weinress & Frankson, Inc. ("Friend"), respectively. The Company also
issued warrants to purchase 500,000 and 250,000 shares of Common Stock
at $8.25 per share to the initial purchasers of the Debentures,
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") and
Oppenheimer & Co., Inc. ("Oppenheimer"), respectively. Under the same
general terms and conditions, DLJ may earn warrants to purchase an
additional 250,000 shares of the Company's Common Stock. In fiscal
1995, in connection with the commencement of their employment with the
Company, Steve Greathouse, the Company's Chairman of the
Board,President and Chief Executive Officer and Dr. Craig Fields, Vice
Chairman of the Board were each granted warrants to purchase 250,000
shares of common stock on the same terms as the Kirkland warrants
described above.
As of June 30, 1995, none of the warrants granted to Kirkland, GSA,
Friend, Greathouse or Fields are exercisable.
6. INCOME TAXES
The Company generally accounts for income taxes and files its income
tax returns on a consolidated basis. However, VSI, in which the
Company holds 100% of the voting interests, has previously filed its
income tax returns on a separate basis and was not consolidated for
tax purposes. During the quarter ended December 31, 1994, the Company
determined that VSI can be consolidated for tax purposes. As a
result, the Company filed for and has received a refund of estimated
income taxes paid for fiscal year 1994.
Effective July 1, 1993, the Company adopted Financial Accounting
Standard No. 109 Accounting for Income Taxes, prospectively. Under
the asset and liability method of Statement 109, deferred tax assets
and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date.
F-13
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended June 30, 1993, 1994 and 1995
6. INCOME TAXES (continued)
The federal and state income tax effects of temporary differences that
give rise to significant portions of the deferred tax assets and
liabilities at June 30, 1995 and 1994 are presented below.
1994 1995
(in thousands)
Deferred Tax Assets:
Net Operating Loss Carryforwards $ 8,495 $ 12,470
Inventory Obsolescence Reserve 578 179
Receivables, Bad Debt Allowance 472 564
Organization and Start-up Costs 267 172
Reserves for abandoned projects 1,577 1,356
Other 307 566
Total gross deferred tax assets 11,696 15,307
Less: Valuation allowance (10,615) (13,908)
Net deferred tax assets $ 1,081 $ 1,399
Deferred tax liabilities:
Property and equipment, principally due to
depreciation differences 1,218 1,399
Total gross deferred tax liabilities (in 1995,
$194 is included in accrued expenses) 1,218 1,399
Net deferred tax assets (liabilities) $ (137) $ ---
The valuation allowance for deferred tax assets as of June 30, 1994
was $10,615,000. The net change in the total valuation allowance for
the twelve months ended June 30, 1995 was an increase of $3,293,000.
At June 30, 1995, the Company has estimated net operating loss
carryforwards for federal income tax purposes of approximately
$36,678,000 which are available to offset future federal taxable
income, if any, expiring in the years 2007 through 2010.
A reconciliation of the Company's provision for income tax expense as
compared to the tax benefit calculated by applying the statutory
federal tax rate to the loss before income taxes follows.
1994 1995
(in thousands)
Statutory Rate $(4,202) $(3,565)
Meals, entertainment 3 27
State Income Taxes 33 67
Tax losses for which no
current benefit is recognized 4,385 3,736
Alternative Minimum Tax 22 ---
$ 241 $ 265
F-14
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended June 30, 1993, 1994 and 1995
6. INCOME TAXES (continued)
The components of the Company's income tax expense for the year ended
June 30, 1995 are:
1994 1995
(in thousands)
Federal - current $ 73 $ ---
State - current 31 102
Federal - deferred 118 163
State - deferred 19 ---
Total $ 241 $ 265
7. STATEMENTS OF CASH FLOWS
The following supplemental information is related to the Consolidated
Statements of Cash Flows. In fiscal 1995, the Company reclassified
approximately $212,000 from receivables to intangible assets and
reclassified other assets of approximately $1,099,000 to property and
equipment ($1,074,000) and receivables ($25,000). Additionally,
numerous non-cash items related to the Company's acquisition of the
general partnership interest in RCVP impacted the statement of cash
flows. The most significant of these non-cash items included non-cash
additions to property, plant and equipment of approximately
$23,400,000 and additions to total debt of approximately $13,839,000.
See also Note 11.
In fiscal 1994, the Company reclassified approximately $1,445,000 of
accounts receivable to intangible assets ($1,393,000) and property and
equipment ($52,000) on a net basis.
Payments for interest expense in 1993, 1994 and 1995 were
approximately $4,408,000, $4,690,000 and $7,102,000 respectively.
F-15
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended June 30, 1993, 1994 and 1995
8. INTERIM FINANCIAL INFORMATION (Unaudited)
Following is the unaudited quarterly results of the Company for the
years ended June 30, 1994 and 1995. This information is not covered
by the Independent Auditors' Report.
Primary
Net Income
Total (Loss) (Loss) Per
Revenues Income Share(1)
(Dollars in thousands, except per share amounts)
1994
First Quarter $28,419 $ (1,376) $ (.14)
Second Quarter 30,566 (1,221) (.12)
Third Quarter 31,807 847 .08
Fourth Quarter 32,262 (11,378) (1.09)
1995
First Quarter $30,824 $ (1,926) $ (.18)
Second Quarter 31,514 (3,090) (.28)
Third Quarter 31,439 (1,775) (.16)
Fourth Quarter 38,211 (3,960) (.34)
(1) The sum of the income (loss) per share for the four quarters,
which are based on average shares outstanding during each quarter,
does not equal income (loss) per share for the year, which is based on
average shares outstanding during the year.
9. RELATED PARTY TRANSACTIONS
The Company sold products to Seeben N.V., a company in which Alfred H.
Wilms is the brother of a member of the company's board of directors.
Sales to this company were approximately $2,000 (1993), $6,000 (1994)
and $0 (1995). No accounts receivable were due from this company at
June 30, 1994 or June 30, 1995. Sales prices and terms were similar
to those of non-affiliated persons.
In March 1992, Alfred H. Wilms, a director and principal stockholder
(and then Chairman and Chief Executive Officer of the Company),
committed to provide or cause others to provide a $6,500,000 five
year, unsecured, subordinated loan to VSI, a majority-controlled
subsidiary of the Company engaged in the Company's Louisiana gaming
device route operations. As consideration for this commitment, the
Company issued to Mr. Wilms five year warrants to purchase 200,000
shares of Common Stock at $2.50 per share subject to certain
adjustments, and agreed to issue an additional warrant to purchase
1,800,000 shares of Common Stock at $2.50 per share subject to certain
adjustments upon complete funding of the loan. At June 30, 1993
approximately $6,000,000 of the loan had been funded. The remaining
$500,000 was funded in October 1993 at which time the Company issued
to Mr. Wilms the additional warrant for 1,800,000 shares of common
stock.
David Robbins, a director appointed to the Board in July 1994, as a
designee of Kirkland Investment Corporation ("KIC"), is employed by
the law firm of Kramer, Levin, Naftalis, Nessen, Kamin & Frankel which
has represented the Company in various matters related to the
Company's growth strategy and its transactions with Kirkland and KIC.
The Company paid fees of approximately $1,046,000 and $493,000 to such
firm in fiscal 1994 and fiscal 1995, respectively.
In connection with the agreements with KIC (100% owned by Joel
Kirschbaum) and its affiliates and related transactions, the Company
has paid to or on behalf of Kirkland and its affiliates a total of
approximately $346,000 in fiscal 1994 and $597,000 in fiscal 1995
primarily for reimbursement of expenses incurred on behalf of the
Company.
F-16
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended June 30, 1993, 1994 and 1995
9. RELATED PARTY TRANSACTIONS (continued)
In 1993 and 1994 the Company entered into employment agreements with
certain key employees. These agreements range from one to three years
in length and cover certain other terms of employment including
compensation. As a condition of his employment, in April 1995 the
Company issued 250,000 shares of common stock to Steve Greathouse, the
Company's Chairman, President and Chief Executive Officer and
recognized a non-cash charge of $1,313,000 related to this
transaction.
10. COMMITMENTS AND CONTINGENCIES
The Company leases office space, equipment, warehouse and repair
facilities, gaming route locations, casino and other locations under
non-cancelable operating leases.
Future minimum rentals under non-cancelable operating leases at June
30, 1995 are:
Year Total Net
Ended Minimum Sublease Minimum
June 30 Rentals Income Rentals
(In thousands)
1996 $ 8,828 $ 921 $ 7,907
1997 6,462 842 5,620
1998 6,173 809 5,364
1999 5,623 758 4,865
2000 3,737 598 3,139
Thereafter 34,349 2,757 31,592
$ 65,172 $ 6,685 $ 53,387
Certain gaming route location leases provide only for contingent
rentals based upon a percentage of gaming revenue and are cancelable
at any time by either party.
Operating lease rental expense, including contingent lease rentals,
for years ended June 30 was as follows:
1993 1994 1995
(In thousands)
Minimum rentals $11,727 $13,743 $9,704
Contingent rentals 49,621 55,910 58,113
61,348 69,653 67,817
Sublease rental income (850) (1,004) (1,192)
$ 60,498 $ 68,649 $ 66,625
These amounts are included in the cost of gaming revenues on the
accompanying Consolidated Statements of Operations.
In April, 1990, the Company entered into a ten year lease to operate a
non-restricted gaming location in Las Vegas, Nevada. The lease
commencement date was scheduled to begin no later than 90 days after
the construction had been finalized. In January, 1991, the Company
received notice that the construction was complete; however, upon
review of the property, the Company did not believe that construction
had been completed. In August, 1992, the lessor filed a suit against
the Company seeking compensatory and exemplary damages totalling
$18,700,000. In fiscal 1992, the Company had accrued a
F-17
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended June 30, 1993, 1994 and 1995
10. COMMITMENTS AND CONTINGENCIES (continued)
$480,000 liability representing back rent owed to the lessor. In
February, 1993 the lawsuit was settled and the Company paid the
liability representing back rent owed to the lessor. In February,
1993 the lawsuit was settled and the Company paid the lessor $425,000
in return for resolution of all prior and current disputes regarding
the lease terms. The lease calls for monthly rentals of approximately
$31,000 and provides for annual increases based on certain indices.
At June 30, 1992, the Company sublet the property to a location
operator in exchange for the right to operate gaming devices at the
property under a space lease arrangement for a period of 10 years
beginning December, 1992.
The Company and Casino Magic Corporation, through wholly owned
subsidiaries, are members in Kansas Gaming Partners, L.L.C. ("KGP")
and Kansas Financial Partners, L.L.C. ("KFP"), both Kansas limited
liability companies. Under an option agreement (the "Option
Agreement") granted to KGP by Camptown Greyhound Racing, Inc.
("Camptown") and The Racing Association of Kansas-Southeast ("TRAK
Southeast"), KGP has been granted the exclusive right, which right
expires on September 13, 2013, to operate gaming devices and/or casino-
type gaming at Camptown's racing facility in Frontenac, Kansas if and
when such gaming is permitted in Kansas. In December 1994, Camptown
received a $3,205,000 loan from Boatmen's Bank which was guaranteed by
KFP. The Company and Casino Magic Corporation each invested $1,580,000
in KFP which was used to purchase a certificate of deposit to
collateralize its guaranty. Construction of Camptown's racing facility
has been completed and the facility opened for business in May 1995.
The racing facility was temporarily closed on November 5, 1995 due to
poor financial results. Camptown filed for reorganization under
Chapter 11 of the U.S. Bankruptcy Code in January 1996 and has stated
an intention to reopen for business following bankruptcy
reorganization. Boatmen's Bank demanded payment of the Camptown loan
from KFP under the terms of the guaranty. KFP paid the loan and
Boatmen's Bank returned KFP's certificate of deposit and KFP assumed
Boatmen's Bank's position in the loan to Camptown which is secured by
a second mortgage on Camptown's greyhound racing facility in
Frontenac, Kansas. TRAK Southeast and Camptown continue to be bound by
the Option Agreement. KFP intends to vigorously pursue all of its
rights and remedies which may include, among other things, seeking
authority from the bankruptcy court to commence a foreclosure action.
In the case of a foreclosure action, KFP would be required to assume
or pay the existing first mortgage of approximately $2,000,000 if KFP
becomes the purchaser at any such sale. The Company intends to
continue to monitor its investment in KFP. The Company believes that
the Kansas legislature may consider at least two gaming bills this
session. One bill, if approved by two thirds of both houses of the
Kansas legislature, would call for a public vote to amend the Kansas
constitution to allow slot machines at up to two gaming locations in
each legislative district, with one location being reserved for any
licensed pari-mutuel location in the district. The second bill, if
passed by a majority of both houses of the Kansas legislature, would
allow, subject to local option election of the citizens in the county,
slot machines at licensed pari-mutuel race tracks.
The Company is also involved in various claims and legal actions
arising in the ordinary course of business. Management of the Company
believes that the ultimate outcome of these matters will not have a
material adverse effect on the Company's consolidated financial
statements taken as a whole.
11. ACQUISITIONS
On July 16, 1994, the Rainbow Casino located in Vicksburg, Mississippi
permanently opened for business. Through a wholly-owned subsidiary,
the Company originally purchased a 45% limited partnership interest in
RCVP, a Mississippi limited partnership which owns the casino, all
assets (including the gaming equipment) associated with the casino and
certain adjacent parcels of land. As consideration for its 45%
limited partnership interest, the Company paid $2,000,000 in cash and
issued 600,000 shares of its common stock to The Rainbow Casino
Corporation ("RCC"), an unaffiliated Mississippi corporation, and its
two sole shareholders. The 55% general partnership interest in RCVP
was held by RCC. In connection with the completion of the casino, the
Company funded a $3,250,000 advance to RCC on the same terms as RCC's
financing from Hospitality Franchise Systems, Inc. ("HFS") (other than
the fact that such advance is subordinate to payments due to HFS). On
March 29, 1995, the Company consummated certain transactions whereby
the Company acquired from RCC the controlling general partnership
interest in RCVP and increased its partnership interest. In exchange
F-18
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended June 30, 1993, 1994 and 1995
11. ACQUISITIONS (continued)
for the assumption by National Gaming Mississippi, Inc. ("NGM"), a
subsidiary of National Gaming Corporation, of approximately $1,140,000
of liabilities (plus a financing fee payable to HFS) related to the
completion of certain incomplete elements of the project which
survived the opening of the casino (for which RCC was to have been
responsible, but failed to satisfy), a related $652,000 cash payment
by the Company to NGM and commitments by the Company and NGM to fund
additional financing required to complete the project: (i) a
subsidiary of the Company became the general partner and RCC became
the limited partner and (ii) the respective partnership interests were
adjusted. As a result of these transactions, RCVP assumed $1,304,000
of new debt of which 50% was payable to the Company. Under the
adjusted partnership interests, RCC is entitled to receive 10% of the
net available cash flows after debt service and other items, as
defined, (which amount shall increase to 20% of cash above $35,000,000
(i.e., only on such incremental amount)), for a period of 15 years,
such period being subject to one year extensions for each year in
which a minimum payment of $50,000 is not made. This transaction was
accounted for as an acquisition using the purchase method.
Accordingly, the purchase price was allocated to assets acquired based
on their estimated fair values. This treatment resulted in no cost in
excess of net assets acquired (goodwill) being recognized. The
Rainbow Casino's results of operations have been included in the
consolidated results of operations since the date of acquisition.
The following summarized, unaudited pro forma results of operations
for the fiscal year ended June 30, 1995, assume the complete
acquisition of RCVP occurred on the date the casino permanently opened
for business.
1995
Revenues $142,051
Net loss (10,862)
Net loss per common share $ (0.96)
12. RECENT DEVELOPMENTS (Unaudited)
On June 19, 1995, the Company publicly proposed a negotiated
acquisition of Bally Gaming International, Inc. ("BGII") for $12.50
per share of BGII common stock. Prior to making this offer, the
Company had acquired 500,000 shares of BGII stock on the open market
and at June 30, 1995 held 1,000,000 shares (approximately 9.3% of
BGII's total outstanding shares, based on BGII's most recent public
filings) which it acquired at an average cost of approximately $10.41
per share. Under the proposed terms of the offer, approximately 60%
of BGII shares not held by the Company would be acquired for cash with
the remainder exchanged for shares of the Company's common stock. The
offer was contingent upon satisfactory due diligence, regulatory and
stockholder approval and reasonable financing. At the time the offer
was made public, the Company requested expedited due diligence,
subject to a confidentiality agreement. BGII had previously announced
a planned merger with WMS Industries, Inc. ("WMS") which included an
exclusive period for WMS to negotiate the terms of that proposed
merger. WMS's exclusive negotiating period had expired several weeks
before the Company's proposal was made without announcement or action
on the part of BGII or WMS. On July 25, 1995, after being refused due
diligence access and the announcement by BGII that a definitive
agreement had been reached to merge with WMS, the Company announced
its intent to make a tender offer for BGII. The tender offer was on
largely the same terms as the originally proposed acquisition. On the
same date, the Company announced it had filed litigation in Delaware
Chancery Court requesting that the court require BGII to grant the
Company due diligence access, enjoin BGII from proceeding with the WMS
merger (including a provision therein requiring the sale of BGII's
German operations) and declare the breakup fee provided for in the WMS
merger to be invalid. The Company indicated that it would increase
the price per share of BGII stock to $13.00 per share if the breakup
fee was declared invalid. The tender offer was conditioned upon the
Company being validly tendered a number of shares of BGII stock, which
combined with its own holdings of such stock, would give the Company a
majority of BGII's outstanding shares. The tender offer commenced on
July 28, 1995. Subsequently, the Company announced its intention to
proceed with a consent solicitation to elect a majority of independent
directors to the
F-19
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended June 30, 1993, 1994 and 1995
12. RECENT DEVELOPMENTS (continued)
BGII Board of Directors. On August 14, 1995, the Company, BGII and
WMS jointly announced an agreement whereby the parties would hold in
abeyance all activities related to pending litigation until September
1, 1995, refrain from commencing new litigation until that same date,
BGII wouldschedule its annual shareholder meeting for consideration of
the proposed WMS merger and the election of directors on October 30,
1995, and the Company would extend the expiration date of the tender
offer until September 12, 1995 and refrain from soliciting proxies
until September 1, 1995. On September 1, 1995, the Company disclosed
that it had obtained firm financing commitments to fund the tender
offer and that such commitments were not conditioned on due diligence
of BGII. Accordingly, the Company extended the expiration date of its
tender offer to September 29, 1995. BGII and WMS filed lawsuits
against the Company alleging numerous public misrepresentations had
been made by the Company withregards to the WMS-BGII agreement, the
Company's tender offer and the level of cooperation of BGII's board of
directors.
F-20
EXHIBIT 21
ALLIANCE GAMING CORPORATION
SUBSIDIARIES OF THE REGISTRANT
AS OF JUNE 30, 1995
Subsidiary State of Incorporation
Casino Electronics, Inc. Nevada
BGII Acquisition Corporation Delaware
APT Games, Inc. Nevada
United Coin Machine Company (1) Nevada
APT Coin Machines, Inc. dba Miss Lucy's (1) Nevada
Slot Palace, Inc. dba Quality Inn Casino (1) Nevada
Trolley Stop, Inc. dba Trolley Stop Casino (1) Nevada
United Games, Inc. (6) Nevada
Mizpah Investments, Inc. dba Mizpah Casino (1) Nevada
Plantation Investments, Inc. dba Plantation Casino (1) Nevada
Double Eagle Hotel and Casino, Inc. (1) Nevada
WCAL, Inc. (1) Nevada
FCJI, Inc. (2) Nevada
Foreign Gaming Ventures, Inc. Nevada
Oregon Ventures, Inc. (3) Nevada
Louisiana Ventures, Inc. (3) Nevada
Video Services, Inc. (4) Louisiana
Video Distributing Services, Inc. (4) Louisiana
Southern Video Services, Inc. (5) Louisiana
Mississippi Ventures, Inc. (3) Nevada
Mississippi Ventures II, Inc. (3) Nevada
United Gaming Rainbow, Inc.(3) Nevada
Rainbow Casino Vicksburg Partnership (7) Mississippi
United Native American, Inc. (3) Nevada
Native American Investments, Inc. (8) Delaware
Indiana Gaming Ventures, Inc. (3) Nevada
United Gaming of Iowa, Inc. (3) Nevada
Kansas Gaming Ventures, Inc. (3) Nevada
Kansas Gaming Partners, LLC (9) Nevada
Kansas Financial Partners, LLC (9) Nevada
Vermont Financial Ventures, Inc. (3) Nevada
Missouri Ventures II, Inc. (3) Nevada
Alpine Willow Investments, Inc. (3) California
Pennsylvania Gaming Ventures I, Inc. (3) Nevada
(1) 100% owned by APT Games, Inc.
(2) 100% owned by WCAL, Inc.
(3) 100% owned by Foreign Gaming Ventures, Inc.
(4) 71% owned by Louisiana Ventures, Inc.
(5) 60% owned by Louisiana Ventures, Inc.
(6) 60% owned by APT Games, Inc.
(7) General partnership interest owned by United Gaming Rainbow, Inc.
(8) 90% owned by United Native American, Inc.
(9) 50% owned by Kansas Gaming Ventures, Inc.
